Investors are likely to see improved returns on cash holdings now that the Federal Reserve has raised interest rates. The Federal Open Market Committee unanimously increased the target range for the federal funds rate by a quarter point, to 3.75% to 4%, marking the first hike since July 2023. As a result, high‑yield savings accounts and certificates of deposit may offer slightly higher yields, according to certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth and member of the CNBC Financial Advisor Council.
However, the landscape includes several options for cash deployment, each with distinct considerations. In addition to high‑yield savings accounts and CDs — both FDIC‑insured — investors can consider money‑market funds and Treasury bills, the latter backed by the U.S. government. The appropriate choice depends on the purpose of the cash, the time horizon, and the investor’s tax bracket.
While higher yields are attractive, inflation can erode real returns. Chris Gunster, head of fixed income at Fidelis Capital, advises keeping cash balances modest, focusing on returns after inflation and taxes. He notes that if inflation outpaces yields on money‑market funds, the investment may not be worthwhile.
Treasury bills, which mature in one year or less, react directly to Fed rate moves. Recent issuances have already priced in the latest rate increase. Bills can be purchased on TreasuryDirect.gov with maturities ranging from four to 52 weeks, and earnings are subject to federal tax but exempt from state and local tax. Exchange‑traded funds such as the iShares 0‑3 Month Treasury Bond ETF (SGOV) and the SPDR Bloomberg 1‑3 Month T‑Bill ETF (BIL) also provide exposure.
High‑yield savings accounts typically track the federal funds rate, though rates can vary by institution due to competitive pressures. Bank of America Securities analyst Ebrahim Poonawala observed that deposit competition is intense, and promotional offers may have already factored in several additional rate hikes, making the rates variable and not lock‑in.
Money‑market funds follow the fed funds rate but adjust more gradually, so they may not reflect the latest hike as quickly as T‑bills. Gunster prefers money‑market funds for client cash, citing a current seven‑day annualized yield of 3.79% on the Crane 100 list of taxable funds. For investors in the highest tax bracket, high‑quality municipal money‑market funds — whose income is federally tax‑free — are recommended.
Certificates of deposit allow investors to lock in rates for specified terms, though early withdrawals incur penalties. Because CD rates are set by banks, they are similar to high‑yield savings rates. A CD ladder — spreading investments across multiple maturities such as six, nine, or twelve months — helps manage liquidity and rate risk, according to Cheng.
For those seeking higher income, floating‑rate assets, including bank loans and collateralized loan obligations (CLOs), can be considered. Their payouts adjust with short‑term interest rates, providing a modest premium. While not a cash substitute, they enable cash to work harder; investors can reinvest earnings or use the income, which is taxable but generally higher.
