By Ian Salisbury
The Federal Reserve is set to cut interest rates again, likely meaning lower payouts on cash-like instruments such as savings accounts, CDs, and money-market funds. Regardless, these could remain attractive places for investors to park savings well into 2025.
The Fed's rate-setting committee is widely expected to cut its federal-funds rate by a quarter of a percentage point to 4.25% to 4.5% at the conclusion of its final meeting of the year today. If that happens, it will make the third cut in a row and push the benchmark rate down a full percentage point from its peak over the summer.
Rates on a range of cash instruments that closely follow the Fed's moves are set to decline, too. Still, payouts on these holdings aren't likely to fall as fast as analysts thought just a few months ago. And given recent struggles of alternatives like longer-term bonds, cash still looks comparatively attractive.
The Best Savings Account and CD Rates
Despite the Fed's anticipated cut Wednesday, top online accounts still pay around 5% or slightly above. The high-yield savings account from TIMBR, an online brand of Bridgewater Bank, pays 5.05%, according to DepositAccounts, a site that tracks the industry. Pibank, a unit of Intercredit Bank, pays 5%.
Rates on money-market funds, mutual funds available through brokerage accounts, aren't far behind. The market leader, Morgan Stanley Institutional Liquid Money Market Portfolio, pays 4.7%, according to Crane data. The average payout among the top 100 taxable money-market funds is 4.4%, according to Crane.
Investors who want to lock in today's interest rates with CDs also have plenty of options, although they may have to accept lower rates if they are looking for terms longer than one year. LimeLight Bank offers 1-year CDs that pay 4.5%. Charles Schwab isn't far behind at 4.4%. Rates edge down, but only slowly, as investors move further along the so-called yield curve, likely because banks expect more interest-rate cuts in the future. LimeLight's three-year CD pays 3.75%, for example.
Cash vs. Bonds
Rates on cash instruments remain attractive because, while Wall Street expects short-term interest rates to decline, analysts expect a slower, more shallow decline than they did just a few months ago. Futures market data suggests there's a 15% chance the fed-funds rate will be at 3.75% or below in July 2025. As recently as September, those chances were pegged at more than 90%.
What gives? A combination of a strong jobs market and a string of stubbornly high inflation readings has made Wall Street seem less confident that policymakers have rising prices under control. The November election may also be a factor since President-elect Donald Trump's promises of heavy import tariffs and deficit-funded tax cuts have the potential to fuel another bout of inflation.
While long-term bonds currently pay lower interest rates than short-term bonds, rates on longer-term bonds have increased recently despite the Fed's rate cuts. Yields on 10-year Treasury notes have jumped to 4.4% from 3.7% three months ago. Since bond yields move in the opposite direction to prices, that has translated into losses for long-term bond investors. The iShares Core US Aggregate Bond exchange-traded fund, a mutual fund designed to track the broad bond market, has posted a negative return of nearly 3% in that time.
In other words, short-term investors with savings accounts or money-market funds risk seeing payouts shrink in coming months. On the other hand, investing in long-term bonds poses its own risks, and cash vehicles look pretty good by comparison.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 18, 2024 13:45 ET (18:45 GMT)
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