: Cash investors may be at ‘the top of the mountain.’ Here’s when 5% CDs and money market funds could finally end.


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The Federal Reserve just held off on another interest-rate hike, and the race is on for people trying to get the tip-top yields on their cash.

Since March 2022, the central bank has been on a parade of interest-rate increases to quell inflation. The target range for the Fed’s key interest rate now sits at 5.25% – 5.50%, the highest it’s been in two decades. The Fed paused once before in June and raised another 25 basis points in July.

The Fed’s upward march has pulled up interest rates and yields, and that’s pulled cash investments such as bank certificates of deposit (CDs) and money market mutual funds into the spotlight.

Both are generating average yields around 5%. But how much longer before the rates decline?

The Fed’s pause Wednesday is one more reminder that savers have a limited window to make the most of high rates, experts say.

“For cash investors, my guess is that the top of the mountain is the pause,” said Eugenio Alemán, chief economist at Raymond James.

In recent decades, the first Fed rate cut has typically occurred around seven months after a pause, he said. “But this is not a typical cycle” of tightening and loosening rates, Alemán quickly added.

The roughly seven-month interval from a pause to the first rate cut has replayed since the 1960s, said Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth Investments. It’s “not at all implausible” that could happen again, he said. “Could it be longer? Sure.”

“As of right now, we might be reaching the peak of rates,” said Ken Tumin, editor of DepositAccounts.com, where users can compare rates on checking accounts, savings accounts and bank CDs.

The average rate on a one-year CD from online banks is up to 5.1%, up from 2.6% at the same point last year, the website showed. In other words, people are raking double the interest just to park their cash in these savings vehicles — for now.

Nearly four in 10 people (38%) said they have more cash in their portfolio since interest rates started increasing, according to an American Association of Individual Investors poll of its members last month. The shift to cash was the most cited asset allocation change, the survey showed.

It’s tricky business trying to time investment and savings decisions against the market and the economy. But here’s what savers and cash investors need to know about the latest Fed meeting.

How much time is left before the Fed cuts interest rates?

That’s the big question. There still may be more rate increases. On Wednesday, the Fed hinted there could be one more 25-basis point hike this year. A basis point is 1/100 of one percentage point.

Raymond James estimates there’s one more rate increase and projects the rate cuts will start in the second half of 2024, Alemán said. Up to three more hikes are needed, Vanguard says.

Banks will reduce their deposit rates as soon as they are convinced for sure that the Fed is through with rate increases, Tumin said. They may even reduce their deposit rates before the first cut, he noted.

“I think you will see the plateau [on rates] pretty quickly when the Fed is clear it will pause for a while,” he said.

But determining when the central bank itself is done tightening has befuddled many lenders and banks trying to make rate decisions, Alemán said.

The plateau and decline may already be showing up in longer-term CDs, Tumin said. The average five-year CD rate is at 3.95%, down from 4.01% in January, he noted.

Does September’s pause predict a cut?

Not necessarily. Though the Fed is sticking at its current benchmark rate, one big plot line Wednesday was its estimations for where interest rates go next.

This is the “dot plot,” released four times a year, which shows the expected path for rate hikes from 19 top Fed officials over the next few years. On Wednesday 12 Fed officials foresaw another 25 basis points and seven didn’t pencil in another.

It’s no ironclad commitment. It’s a forecast based on the information known at the moment, said Charles Rotblut, vice president of the American Association of Individual Investors.

The dot plot, like any forecast, is “color on what people are thinking, but you can’t necessarily make long term decisions based on it either,” he said.

The dot plot is not a good predictor of what’s next, Alemán said.

So if more rate increases — and, by extension, possibly better annual percentage yields (APYs) — are predicted, that might not pan out. At this point, don’t wait on Fed predictions to take advantage of high rates now, he said. “Just grab it,” Alemán said.

What could push interest rates higher?

More inflation that hasn’t been fully punctured by the high interest rates already established. It’s true 2022’s hot inflation has been coming off the boil this year, but August inflation numbers registered the largest month-to-month increase in 14 months.

A lot of that had to do with climbing oil prices, according to the Labor Department. Crude oil prices could return to $100 a barrel by some estimates. “Oil prices will remain a threat,” to future inflation rates, Alemán said.

High oil and gas prices weigh heavy on consumer inflation expectations, Alemán noted.

These consumer outlooks hint at what people are resigned to purchase at expensive prices and Fed officials “are very afraid that expectations could reset again higher,” he said.

The threat of a long-running auto workers strike might contribute to inflation rates, with higher car prices on a smaller supply. Nearly 13,000 United Auto Workers walked off the job at Ford, GM and Stellantis plants last week. The strike could expand Friday if there’s no serious progress in contract negotiations, UAW President Shawn Fain said.

How to make the best of the moment

People making the best of current rates should stick with CDs at and under 12 months, as well as Treasury bills coming due within a year, according to Catherine Valega of Green Bee Advisory in Boston, Mass. Even parking excess cash in a high-yield savings account is an absolutely fine move, she said.

CD ladders are a great move too, she said. That’s the strategy of buying CDs at varying lengths. One example is buying three- , six-, nine- and 12-month CDs, said Tumin of DepositAccounts. “It can help eliminate the guess work where rates are going,” he said.

The most important move is just doing something to make the best of this high-interest-rate moment, Valega said. “It’s this weird little sweet spot that we’re in, which is great.”

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Alexandra Williams
Alexandra Williams
Alexandra Williams is a writer and editor. Angeles. She writes about politics, art, and culture for LinkDaddy News.

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