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It’s looking like interest rates have topped out.
There’s still time to act if you haven’t jumped on the high yields that cash has earned for much of the year. The Federal Reserve may well be done hiking rates, forecasters say, but it won’t begin lowering them for a while.
Recap: Two developments last week reinforced the outlook that the run-up in borrowing costs — initiated by the Fed to contain soaring consumer prices — is over.
On Friday, the Labor Department reported a drop in hiring in October, signaling a further cooling of the job market, which Fed officials say is necessary to get inflation back to their 2 percent target. That followed the central bank’s decision on Wednesday to leave its benchmark lending rate unchanged for its second straight meeting. Fed chair Jerome Powell hinted the 19-month cycle of rate increases might end for now.
“Put a fork in it — they are done,” Jay Bryson, Wells Fargo & Co.’s chief economist, told Bloomberg after the jobs report.
Why it matters: Returns on safe and liquid savings and investment options are about as attractive as they’ve been in 16 years. A flare-up in inflation could send yields even higher. But the odds are good the next sustained move is lower.
What to consider: With that in mind I spoke with Raj Sharma, a private wealth adviser at Merrill Lynch Private Wealth Management in Boston, about options worth investigating to get more bang from your buck, whether it’s money put aside for emergencies or funds you can tap on short notice.
Right off the top, Sharma emphasized that “everyone needs a long-term [investment] plan,” one that doesn’t get jettisoned just to jump on high interest rates.
“I am not suggesting moving money out of equities,” he said. “But investors should take advantage of the opportunities available today” with any extra cash they have, he said.
Money market mutual funds, which hold mostly liquid and safe government securities, function like interest-paying bank accounts. They aren’t insured by the Federal Deposit Insurance Corp., but instances in which investors lost some of their principal have been exceedingly rare.
The average annualized yield on taxable money market funds was 5.19 percent last week, according to the Crane 100 Money Fund index. That compares with 4.6 percent in April and 1.45 percent throughout 2022.
Sharma notes that investors in the highest tax brackets may want to look at money funds that specifically buy Treasuries because the interest paid isn’t taxed at the state level. Money funds that hold municipal bonds are tax-exempt at the federal level, and factoring in that advantage, their yields can exceed those on taxable funds. (There are also municipal money funds that are exempt from Massachusetts tax.)
Variable rate demand obligations are tax-exempt municipal debt securities suitable for high net worth individuals willing to put down the typical $100,000 minimum investment, according to Sharma. They pay interest at a rate that is adjusted periodically (most commonly every seven or 30 days), and investors can get their money back at that time.
Current yields of about 4 percent equate to a taxable yield of more than 7 percent, Sharma said.
High-yield savings accounts are another option if you are willing to trade fluctuating rates for immediate access to your money. Before the Fed began raising rates I moved extra cash into an online-only savings account from Marcus paying 0.5 percent. The account now yields 4.4 percent, and you can find others that pay 5 percent or more. High-yield savings accounts are insured by the FDIC up to $250,000 per person per bank.
Bank certificates of deposits can pay more than high-yield savings accounts and are FDIC-insured, but you have to lock up your cash for anywhere from three months to five years. You’ll most likely pay a penalty to take your money out early.
In April I put money into a 1-year Marcus CD paying 4.75 percent. Today you can find 1-year yields of 5.5 percent or more.
Treasury bills are super-safe short-term government securities that can be bought directly from the US Treasury or through a broker. You get the posted yield if you hold to maturity, but you could take a loss if you sell before that.
A recent 4-week bill yields about 5.4 percent, while a 26-week bill is at 5.49 percent and a 52-week bill brings 5.43 percent.
A final thought: High yields on cash have been the only upside for savers of the Federal Reserve’s campaign to cool inflation by boosting interest rates. Sharma recommends keeping an emergency fund of six months to a year in living expenses in cash or equivalents such as money funds or high-yield savings accounts. But for the long haul, he says stocks are still the way to go.
“Equities have been the best place for long-term appreciation,” he said.