The Federal Open Market Committee raised the federal funds rate by a quarter percentage point to a target range of 3.75% to 4%, marking the first increase since July 2023. This move is anticipated to enhance yields on high-yield savings accounts and certificates of deposit (CDs), as noted by Marguerita Cheng, CEO of Blue Ocean Global Wealth.
However, investors should consider various options for cash management, including money market funds and Treasury bills, each with different risk and return profiles. Chris Gunster from Fidelis Capital emphasized the importance of factoring in inflation when assessing the real returns on cash investments.
Treasury bills, which are expected to reflect the Fed's rate increase in future issues, offer a tax advantage as their income is exempt from state and local taxes. High-yield savings accounts and CDs are influenced by the federal funds rate but can vary by institution. Money market funds, while slower to respond to rate changes, currently offer a competitive yield of 3.79%.
Investors can also consider CD ladders to manage liquidity and interest rate risk effectively. For those seeking higher returns, floating-rate funds that include bank loans may provide additional income opportunities, albeit with more risk.
Overall, the Fed's decision is likely to create a more favorable environment for cash yields, but investors must navigate inflation and varying rates across different cash-equivalent investments