The Fed Just Slashed Interest Rates. Here’s Where to Stash Your Cash Now

Have some spare money? Consider putting the savings in one of these places

Allan Roth,

AARP

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En español

Published February 02, 2023

/ Updated September 19, 2024

A macro close view of the black and white engraving on a cash bill with an overlay of a digital stock market indicator chart

Moment / Getty Images

After four years of interest rate hikes from the Federal Reserve, the central bank announced on Sept. 18 its first cut to the federal funds rate since the COVID crisis threw the economy into a tailspin in March of 2020. The Fed dropped its target range for the benchmark interest rate by half a percentage point to between 4.75 and 5 percent. The rate had sat between 5.25 and 5.5 percent for over a year.

The move will have ripple effects across the U.S. economy, driving down borrowing costs but also depressing interest earned on savings. Importantly, retirees and other savers who count on the income generated by their cash will need to think carefully about where to safely hold their money to earn the best returns.

“Returns on savings accounts, money markets and CDs (certificates of deposit) will come down as the Federal Reserve cuts interest rates, just as they went up when interest rates were rising,” says Greg McBride, chief financial analyst at Bankrate. “But all is not lost for savers, as the top-yielding accounts will continue to earn more than the rate of inflation, even as interest rates go down. That’s a pretty rare circumstance for savers, and it is poised to continue for the foreseeable future.” Inflation is currently sitting at 2.5 percent.

In other words, there are still places where you can stash cash and earn good interest, though you might earn a bit less than you did before the Fed’s latest move. Here are five to consider.

1. Money market accounts

These are safe, conservative options if you want immediate access to your cash, such as by writing a check. Money market accounts come in two types: those issued by banks or credit unions and those from investment companies such as Fidelity, Schwab and Vanguard. Both come with check-writing capabilities, allowing you to withdraw money without any delays or penalties.

You can find current money market account offers on sites like Bankrate, Deposit Accounts and NerdWallet. Recently, a number of money market accounts on Bankrate were offering around 5 percent interest; on a $10,000 deposit, that equates to $500 a year in interest. Bank deposits are guaranteed to at least $250,000 per institution by the Federal Deposit Insurance Corp. (FDIC) or National Credit Union Association (NCUA).

Brokerage firms and mutual fund companies also have money market mutual funds, which are not insured by the federal government. You want to make sure you have a federal money market fund that invests in securities issued by the U.S. Treasury or an agency of the U.S. government. Otherwise, you could lose some of your principal or find out you can’t get your money back for a while.

2. High-yield savings accounts

As the Fed lowers interest rates, high-yield savings accounts — a popular option during the past four years due to their attractive interest rates — will start paying less, but they’ll still be a secure place to store savings in general. Like bank money market accounts, high-yield savings accounts at banks and credit unions are also backed by the FDIC or NCUA, but they generally don’t offer check-writing privileges. Because of that, they typically pay a bit more than money market accounts. This week the best high-yield savings accounts on DepositAccounts.com offered around 5.33 percent, which amounts to interest of $533 a year on $10,000.

3. Certificates of deposit (CDs)

A CD is a deposit at a bank or credit union that earns interest on a lump sum for a fixed period. You typically must leave it for that agreed-upon period of time or you will be charged a penalty. People who bought CDs in recent years will continue to earn high yields, since CD interest rates are locked in at the time of purchase, but rates on new CDs will likely tick down along with Fed rate cuts.

According to recent NerdWallet data, the best one-year CDs offered as high as 5.15 percent interest, or $515 a year for a $10,000 deposit. The same insurance limits apply to CDs as to any other bank account.

4. U.S. Treasury bills

The only thing safer than money backed by the FDIC or NCUA is money directly backed by the U.S. Treasury, and there is no $250,000-per-institution limit. These are like CDs, only they can be sold in the open market. They are also state-tax exempt, meaning you only have to pay federal taxes on the interest. Short-term rates happen to be higher than long-term rates right now. A one-year Treasury bill was yielding 3.84 percent on Sept. 17, or $384 a year for each $10,000. If you live in a high tax state, this could yield even more than a CD after taxes, because Treasury bill interest is free from state and local taxes.

Treasury bills can be bought through most financial institutions, including investment firms such as Fidelity, Schwab and Vanguard. They can also be purchased at banks or from the U.S. government through TreasuryDirect.gov.

5. Treasury Inflation Protected Securities (TIPS)

TIPs pay a fixed amount of return plus inflation, measured by the consumer price index (CPI). Like Treasury bills, they are backed by the U.S. government, interest is exempt from state taxes, and you can sell them in the open market if you don’t want to wait until they mature. You can purchase them at the same places you buy Treasury bills.

The shortest period the U.S. government issues TIPS for is five years. Recently, TIPS that matured in five years yielded 2.125 percent, plus inflation, according to TreasuryDirect.gov. That equates to $212.50, plus whatever inflation turns out to be for each $10,000 invested.

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Allan Roth is a practicing financial planner who has taught finance and behavioral finance at three universities and has written for national publications including The Wall Street Journal.

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