The Federal Reserve’s recent decision to keep its benchmark interest rate unchanged for the seventh consecutive meeting has significant implications for both borrowers and savers. While the unchanged rates keep borrowing costs at a 23-year high, presenting challenges for those with variable-rate debt and those seeking new loans, savers continue to benefit from the high-interest-rate environment.
The Federal Reserve’s decision, announced on Wednesday, was anticipated by many economists and market watchers. The central bank’s stance suggests that high rates will persist for the foreseeable future, with only one potential rate cut predicted before the year’s end, according to the latest summary of economic projections from US central bankers. However, any forthcoming rate cuts are expected to be gradual and incremental.
Impact on Borrowers
For borrowers, the continued high-interest rates mean that the cost of carrying variable-rate debt, such as credit cards, and obtaining new loans remains steep. Greg McBride, chief financial analyst at Bankrate.com, advises those with high-interest debt to take proactive steps. “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,” McBride said. He recommends utilizing zero-percent credit card balance transfer offers, shopping around for lower fixed-rate personal loans and home equity loans, and directing as much income as possible toward paying down existing debt quickly.
Benefits for Savers
On the flip side, the Federal Reserve’s decision is advantageous for savers, who are currently enjoying the highest returns on savings accounts and certificates of deposit (CDs) in over 15 years. McBride points out that the most competitive offers are now outpacing inflation, a rare and beneficial scenario for those looking to grow their savings. “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,” he said.
Online High-Yield Savings Accounts
Among the best options for savers are online high-yield savings accounts offered by FDIC-insured banks. These accounts typically offer significantly higher interest rates compared to the national average savings rate of 0.58%. As of June 11, the average online savings account rate was 4.40%, with many high-yield accounts offering rates of 5% or more. For example, a $10,000 deposit in a high-yield account at 5% interest would yield $500 in a year, compared to just $50 in a regular savings account with a 0.5% rate. High-yield savings accounts are ideal for parking money needed for emergencies or anticipated large expenses within the next few months to a year.
Money Market Accounts and Funds
Money market accounts and money market mutual funds also offer competitive yields, comparable to high-yield savings accounts. Money market deposit accounts are bank products insured by the FDIC, while money market mutual funds invest in short-term, low-risk debt instruments. Currently, money market funds are yielding an average of 5.12%, making them a suitable option for cash held in brokerage accounts for future investments in equities or bonds. However, it’s essential to note that money market funds are not FDIC-insured, though brokerage accounts are typically insured by the Securities Investor Protection Corporation (SIPC).
Certificates of Deposit (CDs)
For those who can leave their money untouched for a fixed period, CDs remain a strong option. As of June 11, the average rate for an online one-year CD was 4.971%, and 3.815% for a five-year CD. While traditional banks may offer competitive CD rates, online brokerages often provide access to a wider range of CDs from various banks, potentially offering higher returns. At Schwab.com, for instance, CDs with durations ranging from three months to ten years offered average annual returns over 5%, with the highest reaching 5.56% for a three-month CD.
Treasury Bills and Notes
Investing in short-term Treasury bills and intermediate-term Treasury notes is another way to earn competitive returns with minimal risk, as these securities are backed by the full faith and credit of the United States government. Treasury bills come in various maturities, from four weeks to 52 weeks, while Treasury notes mature in two to ten years. According to Collin Martin, fixed income strategist at the Schwab Center for Financial Research, Treasury bill yields are expected to hover around 5.25% as long as the Fed maintains its current rate range. Investors might consider locking in higher yields with intermediate-term Treasury notes before anticipated rate cuts reduce future returns.
Tax Considerations and Purchasing Options
When choosing between CDs and Treasuries, it’s important to consider tax implications. Interest on Treasuries is exempt from state and local taxes, which can be advantageous for residents of high-tax states. Treasuries and other bonds can be easily purchased through brokerage accounts, providing a convenient way to diversify savings and investment portfolios.
In summary, the Federal Reserve’s decision to maintain high interest rates continues to create a favorable environment for savers, offering opportunities to earn substantial returns on savings accounts, CDs, money market accounts, and Treasury securities. While borrowers face challenges with high borrowing costs, savers can capitalize on this period to grow their wealth and achieve financial stability. As always, consulting with financial advisors and staying informed about market conditions can help individuals make the most of their financial opportunities in this high-interest-rate landscape.
