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With the Federal Reserve expected to cut interest rates again this week, it’s a great time to earn competitive returns on cash, experts say.
“The best offers on savings accounts, money markets and CDs [certificates of deposit] are still well above inflation, and that’s likely to persist well into 2025,” said Greg McBride, chief financial analyst at Bankrate.
The Fed may cut interest rates by one-quarter of a percentage point on Dec. 18 at the end of its two-day meeting, experts predict. If it does, that would mark the third time the central bank has lowered rates since September, for a total reduction of 1 percentage point.
“There’s an urgency to act now,” McBride said. “You won’t get better yields by waiting.”
Yields may be lower by January
Consumers who are tempted to hold out may miss an opportunity to lock in better returns on their cash.
“If you’ve got money to put to work, there’s a good chance yields are going to be lower next month than where they are today,” McBride said.
By putting that money to work now, you can lock in yields that compare very favorably to inflation, he said.
Treasury bonds and many CDs are offering yields above 4%, with the ability to lock in that return for multiple years at a time, McBride said.
That could be an opportunity for savers who don’t need immediate access to their cash or who are looking to generate interest income or diversify their broader portfolio, he said.
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Another investment — Series I bonds — offers a way to beat inflation, McBride said. I bonds currently pay a guaranteed 1.2% fixed rate above the rate of inflation.
Notably, I bonds have some limitations, including a cap on annual purchases. Moreover, you can’t cash them in in the first year, and you also have to give up three months’ interest if you cash in before the five-year mark, McBride said.
“You’ve got to be pretty sure about your ability to live without the cash in order to get the full bang for your buck,” McBride said.
Alternatively, savers may opt for another government investment that also offers inflation protection — Treasury Inflation Protected Securities. TIPS allow for higher annual investments compared with I bonds, as well as more liquidity, since they can be bought and sold on the secondary market. As of Dec. 16, a five-year TIP yields 1.88% above inflation.
When to prioritize cash liquidity
Whether it makes sense to lock in returns on your cash now largely depends on the outlook for 2025.
With less expectation for additional interest rate cuts in 2025, there may not be as much reason to lock in returns on cash now, said Ken Tumin, founder of DepositAccounts.com.
Moreover, high-yield online savings account rates are generally higher than what CDs now offer, he said. Some online banks are offering over 5% annual percentage yields even on small balances, while the best one-year CD provides 4.65% with a $50,000 deposit.
“One strategy now is just maintaining liquidity in one of the top online savings accounts and not necessarily locking it in,” Tumin said.
Alternatively, savers may hedge their bets, he said, and put half their cash deposits in a high-yield savings account and the other half in longer-term CDs.