If interest rates remain 'higher for longer,' the winners are those with cash accounts
Many people, especially those with debt, will be discouraged by the recent Federal Reserve forecast of a slower pace of interest rate cuts than previously forecast.
However, others with money in high-yield cash accounts will benefit from a «higher for longer» regime, experts say.
«If you've got your money in the right place, 2025 is going to be a good year for savers — much like 2024 was,» said Greg McBride, chief financial analyst at Bankrate.
Returns on cash holdings are generally correlated with the Fed's benchmark interest rate. If the Fed raises interest rates, then those for high-yield savings accounts, certificates of deposit, money market funds and other types of cash accounts generally rise, too.
The Fed increased its benchmark rate aggressively in 2022 and 2023 to rein in high inflation, ultimately bringing borrowing costs from rock-bottom rates to their highest level in more than 22 years.
It started throttling them back in September. However, Fed officials projected this month that it would cut rates just twice in 2025 instead of the four it had expected three months earlier.
«Higher for longer is the mantra headed into 2025,» McBride said. «The big change since September is explained by notable upward revisions to the Fed's own inflation projections for 2025.»
The bad news for consumers is that higher interest rates increase the cost of borrowing, said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
"[But] higher interest rates can help individuals of all ages and stages build savings and prepare for any emergencies or opportunities that may arise — that's the good news," said Cheng, who is a member of CNBC's Financial Advisor Council.
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