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American Focus > Blog > Economy > If interest rates stay ‘higher for longer,’ the winners are those with cash accounts
Economy

If interest rates stay ‘higher for longer,’ the winners are those with cash accounts

Last updated: December 27, 2024 9:41 am
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If interest rates stay ‘higher for longer,’ the winners are those with cash accounts
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The Federal Reserve’s recent forecast of a slower pace of interest rate cuts has left many people feeling discouraged, especially those with debt. However, experts are pointing out that there is a silver lining for those with money in high-yield cash accounts. According to Greg McBride, chief financial analyst at Bankrate, 2025 is shaping up to be a good year for savers, much like 2024 was.

The concept of “higher for longer” is expected to be the mantra for 2025. Returns on cash holdings are typically correlated with the Fed’s benchmark interest rate. As the Fed raises interest rates, high-yield savings accounts, certificates of deposit, money market funds, and other cash accounts also see an increase in their rates. The Fed had aggressively raised its benchmark rate in 2022 and 2023 to combat high inflation, bringing borrowing costs to their highest level in over 22 years. While the Fed has started to throttle back on rate hikes, it is now projected to cut rates just twice in 2025, down from the four cuts expected earlier.

The good news for consumers is that higher interest rates can help individuals build savings and prepare for emergencies or opportunities. Marguerita Cheng, a certified financial planner, notes that while higher interest rates may increase the cost of borrowing, they can also provide an opportunity to grow savings. High-yield savings accounts that offer interest rates between 4% and 5% are still prevalent, compared to the 0.5% rates seen in 2020 and 2021.

When considering cash investments, investors need to weigh the pros and cons of high-yield savings accounts versus certificates of deposit (CDs). High-yield savings accounts offer more liquidity and access, but the interest rate is not fixed or guaranteed. On the other hand, CDs provide a fixed guaranteed interest rate but come with limited liquidity and access. Some institutions may have minimum deposit requirements to access certain advertised yields, and not all institutions offering high-yield savings accounts are covered by Federal Deposit Insurance Corp. protections.

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It’s essential to ensure that your money is deposited in a federally insured bank to protect your savings in case of a bank failure. Avoid fintech middlemen that rely on third-party partnerships with banks for FDIC insurance, as recent instances like the bankruptcy of Synapse have highlighted the risks associated with such arrangements. By carefully considering these factors, savers can make informed decisions about where to stash their cash in 2025.

TAGGED:AccountscashhigherinterestLongerratesstaywinners
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