As the US Federal Reserve (Fed) is likely to keep interest rates ‘higher for longer’, there is a mixed feeling among financial consumers. While it is expected to be difficult for those with debt, it could have a positive effect for savers with high-yield savings accounts. Experts emphasize that this situation will bring about a change in savings culture.
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[Korea Today] Panoramic view of the US Federal Reserve (FRB) building © Reporter Hyun Seung-min |
Greg McBride, senior financial analyst at Bankrate, sees 2025 as a good year for savers, saying, “For those who choose the right accounts, 2025 will go down as the year of savings.” Interest rates on cash assets, such as high-yield savings accounts, are likely to remain high, driven by the Fed’s interest rate policy, and this is likely to continue in a similar pattern to 2024.
The Fed has been rapidly raising interest rates in an effort to curb high inflation through 2022 and 2023. This has pushed borrowing costs to their highest levels in 22 years, while also pushing up the yields on cash assets such as high-yield savings accounts, certificates of deposit (CDs), and money market funds. But the Fed has shifted to a more gradual path of lowering rates, with only two more cuts expected by 2025. This creates an environment that is both burdensome for consumers and offers opportunities for savings.
Higher interest rates have the disadvantage of increasing the cost of borrowing, but they also open up opportunities to increase savings and build financial stability. “Higher interest rates can help people of all ages build savings for emergencies or opportunities,” says financial expert Marguerita Cheng. In this environment, high-yield savings accounts offer interest rates of 4% to 5%, a significant improvement over the 0.5% or so they paid in 2020 and 2021.
High-yield savings accounts are mostly offered by online banks, while traditional banks often still offer low yields. Consumers should consider a number of factors in addition to interest rates when choosing an account. The most important criteria for choosing a savings account and a certificate of deposit (CD) are liquidity and stability. “High-yield savings accounts offer good liquidity and accessibility, but they do not have fixed interest rates. CDs, on the other hand, offer fixed interest rates but sacrifice liquidity,” Cheng explains.
It is also essential to choose a bank that is insured by the Federal Deposit Insurance Corporation (FDIC). “It is safer to choose a bank that is insured by the FDIC than a fintech company that is not insured by the federal government,” McBride emphasized. In fact, the recent bankruptcy of a fintech company shows how risky an uninsured account can be.
The possibility of interest rates remaining high for an extended period of time presents both new challenges and opportunities for consumers. Consumers can maximize their savings and ensure financial stability by carefully selecting high-yield financial products and making appropriate plans. It is especially important to carefully review FDIC insured status and the liquidity of financial products.
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