From March 2022 through July 2023, the Federal Reserve rose the bank lending rate from 0% to 5.25%. It was a huge change from the prior years of zero interest rate policy. For the past year, it has been possible to get a fair rate of return on extra cash in your bank account. Granted, you had to work with your bank to do so, since they didn’t raise your interest rate without your input.
But now, the Federal Reserve is talking about lowering interest rates starting at their September meeting. Once they start, it should be a progressive lowering of the bank lending rate for some period of time. If they accomplish their “soft landing” scenario, then they would be lowering interest rates back to the 2-3% range.
So now that rates are going to drop, what options are there for that “extra cash”?
– CD’s are a good option for money that you want to keep close by. For now, you can still get a decent rate on short-term CD’s. The average 1 year rate is currently around 4.7%.
– Putting your money into a Money Market Account will continue to earn a fair rate of return. Most Money Market Accounts require you to keep a minimum balance in the account, but online banks have lower (or zero) minimums. As rates decrease, your money market rate will decrease in lock step.
– U.S. Treasury Bonds can be purchased directly from the U.S. Treasury at https://www.treasurydirect.gov/. They are available in $1,000 increments as well as with monthly or yearly time frames. This is a good choice for people who are looking for diverse time frames.
If you are looking to park cash over a longer time period, Investment Grade Corporate Bonds offer higher interest rates than U.S. Treasuries. You can lock in rates above 4% for time periods longer than 2 years. Investing in individual bonds also gives you the option to sell before the bonds mature (in case you need your funds sooner). It does take a bit more time, effort and research, but the yield improvement can be significant. (And if interest rates move lower during your holding period, you can sell the holding and reap a capital gain in addition to the interest.)