Winners of Prolonged Higher Interest Rates: Cash Account Holders
In a recent Federal Reserve forecast, the news of a slower pace of interest rate cuts than previously expected has left many, especially those with debt, feeling discouraged. However, for those with money in high-yield cash accounts, this announcement spells good news.
The ‘Higher for Longer’ Mantra in 2025
Greg McBride, the chief financial analyst at Bankrate, expressed optimism for savers in the upcoming year. He mentioned that if your money is in the right place, 2025 could be a beneficial year for you. The returns on cash holdings are closely tied to the Fed’s benchmark interest rate. As the Fed raises interest rates, high-yield savings accounts, certificates of deposit, money market funds, and other types of cash accounts generally see an increase in rates as well.
The Fed’s decision to cut rates just twice in 2025, as opposed to the four times expected earlier, is due to notable upward revisions in the Fed’s own inflation projections. This change has led to a shift towards a “higher for longer” mantra in the financial world for the upcoming year.
The Good and Bad News for Consumers
Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth, highlighted the impact of higher interest rates on consumers. While borrowing costs may increase, higher interest rates can also help individuals build savings and prepare for any unforeseen financial circumstances that may arise. Top-yielding high-yield savings accounts that paid around 0.5% in 2020 and 2021 are now offering interest rates between 4% and 5%.
According to McBride, online banks offer the most competitive returns for high-yield savings accounts compared to traditional brick-and-mortar banks. While high-yield savings accounts provide more liquidity and access, CDs offer a fixed interest rate but lack liquidity and access.
Considerations for Cash Investors
Cheng advised investors to carefully consider whether a high-yield savings account or a CD would be a better fit for their financial goals. Some institutions may have minimum deposit requirements to qualify for certain interest rates, and not all institutions offering high-yield savings accounts are covered by Federal Deposit Insurance Corp. protections.
McBride emphasized the importance of ensuring that your money is deposited directly into a federally insured bank to avoid any risks. The recent bankruptcy of a fintech company, Synapse, has highlighted the potential dangers of relying on third-party partnerships for FDIC insurance coverage.
