If interest rates stay “higher for longer,” the winners will be those with cash accounts

Many people, especially those with debt, will be discouraged by the Federal Reserve’s recent prediction that interest rate cuts will be slower than previously forecast.

However, others with money in high-yield cash accounts will benefit from a ‘higher for longer’ regime, experts say.

“If you have your money in the right place, 2025 will be a good year for savers – just like 2024 was,” said Greg McBride, chief financial analyst at Bankrate.

Cash returns are generally correlated with the Fed’s interest rate. When the Fed raises interest rates, those on high-yield savings accounts, certificates of deposit, money market funds and other types of cash accounts typically rise as well.

The Fed aggressively raised its benchmark interest rate in 2022 and 2023 to rein in high inflation, ultimately pushing funding costs from rock-bottom rates to the highest level in more than 22 years.

It started to throttle them in September. However, Fed officials predicted this month that rates would be cut only twice in 2025, instead of the four they expected three months earlier.

“Longer and higher is the mantra going into 2025,” McBride said. “The big change since September is explained by notable upward revisions to the Fed’s own inflation projections for 2025.”

The bad news for consumers is that higher interest rates increase the cost of borrowing, says Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.

“[But] Higher interest rates can help individuals of all ages and stages build savings and prepare for any emergencies or opportunities that may arise – that’s the good news,” said Cheng, a member of CNBC’s Financial Advisor Council.

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High-yield savings accounts with interest between 4% and 5% are “still common,” McBride said.

By comparison, the highest-yielding accounts paid about 0.5% in 2020 and 2021, he said.

The story is similar for money market funds, he explained.

Interest rates for money market funds vary by fund and institution, but high-yield funds typically range between 4% and 5%.

However, not all financial institutions pay these rates.

The most competitive returns for high-yield savings accounts come from online banks, not the traditional brick-and-mortar store down the street, which might, for example, yield a 0.1% return, McBride said.

There are, of course, some considerations that investors need to make.

People always wonder which is better: a high-yield savings account or a CD, Cheng said.

“It depends,” she said. “High yield savings accounts offer more liquidity and access, but the interest rate is not fixed or guaranteed. The interest rate will fluctuate, as will your principal. A CD offers a fixed guaranteed interest rate, but you give up liquidity and access.”

Additionally, some institutions will have minimum deposit requirements to get a certain advertised return, experts said.

Moreover, not all institutions that offer a high-yield savings account are necessarily covered by this scheme Federal Deposit Insurance Corp. protective measures, McBride said. Deposits up to $250,000 are automatically protected at any FDIC-insured bank in the event of a bankruptcy.

“Make sure you send your money directly to a federally insured bank,” McBride said. “I would avoid fintech intermediaries that rely on third-party partnerships with banks for FDIC insurance.”

A recent bankruptcy of a fintech company, Synapse, underlines this “unappreciated risk,” McBride said. Many Synapse customers have been unable to access most or all of their savings.