I speak to lots of folks every day in my work and in my travels. These people are all very sophisticated – they are lawyers, doctors, engineers and other professionals.
It has already been four months since the interest rate environment began to change, and consumers can now easily access rates approaching 4% on savings accounts and well over 4% on short term CDs.
And, the Fed is poised to move still higher next week and possibly in February, making the opportunity to earn interest without any risk (or at least to maintain some degree of purchasing power parity) more interesting than it has been in decades (or at least since 2006). Yet, for some reason, it just isn’t apparent to all.
I am surprised when I mention that I own BestCashCow that I frequently am told with a high degree of conviction that 2% is a competitive savings rate right now (it isn’t) or that locking up money for the next 12 months at 3.50% makes good sense (it doesn’t).
As we approach year-end and the holiday season it is a good time to do a little financial “house-cleaning”. The easiest house-cleaning to do is to make sure that all of your cash is earning a competitive rate of return.
Take 5 minutes and check the leading savings rates here and short-term CD rates here. (If you want to bank locally, instead of online, then check local savings rates here and local CDs here.)
The Powell Fed has completed its November meeting with its sixth rate hike of 2022, bringing the Fed Funds rate to almost 4% for the first time in a generation. The Fed still isn’t finished with rate hikes as it moves late to get a handle on soaring inflation that has now permeated the US economy and shows no signs of moderating.
The Fed says that ongoing rate increases are appropriate, but that it will begin to assess the cumulative tightening of monetary policy. Even if the 75 basis point moves are over, it is very possible that we will see a further 50 basis point hike in December and one or two more hikes in 2023 before beginning to pivot.
For an economy that has grown addicted to a very cheap cost of capital, the Fed’s moves continue to be difficult to swallow, and that is why the Fed is now speaking about the cumulative impact of its actions. And, whatever the Fed's goals are, as the Fed gets closer and closer to its peak funds rate (what is now being referred to as a “terminal rate”), financial markets are breathing a sigh of relief.
It is worth emphasizing again that the Fed was late to react to clear signs of incipient inflation in 2020 and 2021, with Jerome Powell and Treasury Secretary Janet Yellen referring to pricing pressure as transient and insisting on holding the Fed funds rate at zero well into 2022 which further fed the inflation beast that they are now trying to tame.
It also bears repeating that nobody has seen inflationary pressures that are as acute as those we are now facing since the 1970s. While many financial analysts continue to believe that the terminal rate will be no higher that 5%, there continues to be a risk that the Fed may need to move much higher to get things under control, especially since Powell himself believes that the only precedent available to him is Fed Chair Paul Volcker’s actions in the 1970s.
Against that backdrop, I am frequently asked whether online savings rates make sense, given that the top rates lag below not only US Treasuries but short term brokered CDs. The answer is that they do until we have greater certainty that the Fed is nearing completion of the cycle. Going into today’s move, the top online savings rates were at or just over 3.50% APY, and it seems likely that they will go above 4% before the end of the year. The incremental gain in buying even a short brokered CD seems to be outweighed by the risk that we still haven’t priced in rates where we need to go to control inflation.
(Take it from me, I personally bought 2.65% 6-month brokered CDs less than three months ago, and am very glad that I acted in moderation!)
Bottom line: Continue to ride the wave by seeking the best online savings rates here.
The Federal Reserve has raised the Fed Funds target rate by 75 basis points to a target rate of 3.00% to 3.25%. This is the highest it has been since 2008.
The rate represents the third successive 75 basis point rate increase as the Federal Reserve moves desperately and late to try to get control of inflation in the US. The rate is now dramatically higher than it was at the beginning of 2022, at which point Fed Chairman Jerome Powell was still holding its target at 0 to 0.25% as part of its COVID-19 emergency stimulation measures.
More importantly, the Fed has sharply raised its Fed funds target for the end of 2022 and into 2023. Its target rate for the Fed Funds future rate in three months time is now 4.40% (versus earlier guidance of 3.40%), meaning we now have another 125 basis points or so of additional rate hikes in October, November and December. And, into 2023, the Fed will hold rates higher for longer to fight inflation.
As the Fed Funds rate increases and as liquidity is removed from the system, you should expect to see more competition for your cash. If you bank is not increasing its savings rate commensurately in order to stay competitive, consider moving to a more competitive online savings or money market account.
