Many people, particularly those in debt, may feel disheartened by the recent Federal Reserve announcement of a slower pace of interest rate cuts compared to previous forecasts. On the other hand, individuals with funds in high-yield cash accounts are expected to benefit from a “higher for longer” scenario, according to experts.
Greg McBride, chief financial analyst at Bankrate, mentioned that if money is placed correctly, 2025 could be a favorable year for savers, similar to 2024. Returns on cash holdings are typically linked to the Fed’s benchmark interest rate. When the Fed raises interest rates, it usually leads to an increase in rates for high-yield savings accounts, certificates of deposit, money market funds, and other cash accounts.
The Fed had aggressively raised its benchmark rate in 2022 and 2023 to combat high inflation, resulting in borrowing costs reaching their highest level in over 22 years. However, the Fed recently projected only two rate cuts in 2025, down from the four expected earlier, indicating a shift towards a “higher for longer” approach.
While higher interest rates can raise borrowing costs for consumers, they can also help individuals save and prepare for future needs or opportunities. High-yield savings accounts offering interest rates between 4% and 5% are still common, compared to the lower rates seen in 2020 and 2021.
McBride highlighted that online banks typically offer more competitive rates for high-yield savings accounts compared to traditional brick-and-mortar banks. It’s essential for investors to consider factors like liquidity, fixed interest rates, minimum deposit requirements, and FDIC insurance coverage when choosing between high-yield savings accounts and certificates of deposit.
McBride advised caution when dealing with fintech companies that rely on third-party partnerships for FDIC insurance, citing the recent case of Synapse’s bankruptcy, which left many customers unable to access their savings.
