Editor’s Note: This is an updated version of an article that originally ran on May 1.
As was widely expected, the Federal Reserve left its benchmark interest rate unchanged for its seventh meeting in a row on Wednesday.
People carrying variable-rate debt like credit cards and those seeking a loan won’t be happy given that the Fed’s rate, which directly and indirectly affects consumers’ borrowing costs, remains at a 23-year high.
Those rates will likely stay high for a while. At this point, only one cut is seen as likely before the end of the year, according to US central bankers’ latest summary of economic projections. But whenever the cuts start, they may be small.
“Absent a complete about-face from the economy, interest rates aren’t likely to come down soon enough, or fast enough, to provide meaningful relief to borrowers. Utilize zero-percent credit card balance transfer offers, shop around for lower fixed-rate personal loans and home equity loans, and channel as much income as possible toward paying down this debt as quickly as possible,” said Greg McBride, Bankrate.com’s chief financial analyst.
But the Fed’s decision leaves savers, once again, in the catbird seat when it comes to making money on their money.
“Savers are enjoying the best returns on savings accounts and CDs in more than 15 years, with the most competitive offers outpacing inflation. In addition, these conditions are poised to persist for the foreseeable future,” McBride said.
The best bang for your savings can still be had in online high-yield savings accounts at FDIC-insured banks, which yield way more than today’s 0.58% overall average savings rate.
As of June 11, the average online savings account rate was 4.40%, according to DepositAccounts.com. And many online high-yield accounts continue to offer rates of 5% or more.
Say you have $10,000 in savings. If you leave it parked in a regular savings account at 0.5%, you’ll get $50 in interest for a year. If you put it instead in a 5% high-yield account, you’ll get $500.
A high-yield savings account is the best place to park money you’ll need to cover emergencies as well as anticipated large expenses that you have to pay in the next three months to a year.
As with any savings account, banks can lower the rate they offer — also known as the APY — at any time. And you can be sure they will do just that when the Fed looks like it will finally start cutting rates, McBride said.
But, he added, since rates are likely to be cut in small increments, online high-yield savings accounts may continue to offer inflation-beating returns for some time.
“They will still offer the best way to preserve your [money’s] buying power,” McBride said.
Money market accounts and money market funds
Money market deposit accounts and money market mutual funds are generating yields competitive with the best high-yield savings accounts. But there are important differences.
Money market deposit accounts are bank products. So, assuming your bank is FDIC insured, your account is too. (Or, if your account is at a federally backed credit union, your money will be insured by the National Credit Union Share Insurance Fund.)
As with high-yield accounts, you may get the best deals at an online bank. But money market accounts may have a higher minimum deposit requirement than a high-yield account.
Money market funds, by contrast, are an investment product — they generate return by investing in short-term, low-risk debt instruments and are currently yielding an average of 5.12%, according to the Crane 100 Money Fund Index. Such funds are a good place to park cash you have in your brokerage account that you may want to use at some point to buy equities or bonds, McBride said. Money market funds are not FDIC-insured, but any brokerage you use should be insured by the Securities Investor Protection Corporation, which covers your funds up to a limit if your brokerage ever goes under.
CDs are still a great place to park any money you can leave untouched for a fixed period of time — anywhere from a few months to five years or longer.
As of June 11, the average rate was 4.971% on an online one-year CD, and 3.815% on a five-year CD, according to DepositAccounts.com.
While your brick-and-mortar bank may offer a CD at a good rate, you may get a better one shopping around. The easiest way to do that without having to set up an additional account at another bank is to shop for CDs through your online brokerage, which is likely to offer a wide array of CDs from many different banks.
At Schwab.com, for instance, CDs on offer ranging in duration from three months all the way up to 10 years offered average annual returns over 5%, with most ranging between 5.30% and 5.45%. The highest annual average was 5.56% for a three-month CD.
If you have to withdraw money before the end of a CD’s term, you can always get all of your principal back but may forfeit some of the interest earned as an early withdrawal penalty.
Treasury bills and notes
Beyond deposit accounts, investing in short-term Treasury bills and intermediate-term Treasury notes has been another way to earn a competitive return with virtually no risk since Treasuries are backed by the full faith and credit of the United States.
Treasury bills come in six different maturities: 4 weeks, 8 weeks, 13 weeks, 17 weeks, 26 weeks and 52 weeks. Treasury notes mature in two, three, five, seven or 10 years.
“As long as the Fed holds its rate in the 5.25% to 5.5% range, we expect most Treasury bill yields to hover around 5.25% as well,” said Collin Martin, fixed income strategist at the Schwab Center for Financial Research.
But, Martin added, “While the timing of rate cuts has been pushed back, we still expect them to arrive later this year, and investors in short-term investments would likely face reinvestment risk.”
That’s why he suggests investors consider buying some intermediate-term investments now before rates are cut if they want to lock in a higher yield for some of their money, such as Treasury notes maturing in the next four to 10 years.
On Wednesday, yields on Treasury bills were north of 5% and yields on Treasury notes were north of 4%, according to Schwab.com.
When deciding whether it makes sense to invest in a CD or a Treasury for the same duration, you might opt for the Treasury if you live in a high-tax state, McBride suggested, since interest on Treasuries is exempt from state and local taxes.
In all instances, the easiest way to purchase Treasuries and other bonds is to do so through your brokerage account.
