While the rate environment is dramatically different now, the most important piece of advice that I can give as we enter 2023 is the same as that which I would have given in 2022, 2021, or 2020. Get your cash out of non-competitive account. Whereas in past years, that advice meant encouraging people to move their money from accounts paying 0.01% to those paying 0.60%, top rates are now 6 or 7 times higher, making it even more important to act now. The old excuses – “we aren’t talking about a lot of money”, “I am making so much on the market, in bitcoin, etc.”, “it just isn’t worth my time”, “my tax bracket is so high that all the extra earnings will be taxed away anyway” – don’t work anymore. And, with inflation real and present, earning more on your cash gives you a fighting chance on maintaining purchasing power parity.
Even though the Fed is not finished raising rates, many are eager to lock down the certainty in earnings that a one-year, 18-month or two-year certificates of deposit now offer. While short-term US Treasuries have been compelling over the last several months, short-term CDs may become dramatically more compelling as banks and credit unions are forced to seek capital to maintain FDIC and NCUA deposit requirements in early 2023. Do not take it for granted that short term US Treasury will remain above similar duration bank CD rates.
If you are willing to sacrifice liquidity in order to secure an attractive, fixed interest rate for a longer period (3 years, 4 years or 5 years), online bank or credit union CDs are now your best bet. US Treasury bonds are currently offering much lower yields for these durations, even after accounting for their state and local tax benefits. Agency bonds – particularly those offered by Federal Home Loan Bank, Federal Farm Credit Bank and TVA which are state and local tax free - may offer higher rates than CDs, but are always callable after one year or less. Also, they are considered by many to be less secure than CDs (as long as you stay within FDIC and NCUA limits) as there is a moral obligation on the part of the federal government, but not the explicit guarantee that the FDIC and NCUA provide.
There are a lot of ways to earn more in 2023 and we hope you’ll continue to make BestCashCow part of your strategy.
The Federal Reserve moved to raise the Fed Funds rate by 50 basis points to a target of 4.25% to 4.50%. The move was well telegraphed by the Fed and completely anticipated by the markets. The move follows four consecutive 75 basis point hikes, and means that the Fed ends 2022 with a full 425 basis points of rate hikes (having begun its hikes from a rate of 0 to 25 bps earlier in the year).
The Fed’s hawkishness caught markets on edge after a presentation by Powell indicated that inflation was decelerating and led many market participants to believe that the Fed can slow its actions.
Rather, Powell has been very clear. Multiple, ongoing rate hikes will be appropriate. While he says that he and the Fed haven’t made a judgment about whether a 25 or 50 basis point hike in February will be appropriate, the consensus is that the Fed needs to get to a final (or terminal) rate much higher than had been previously estimated.
The new target terminal rate for later is 2023 is 5.10%, with 17 of 19 FOMC participants believing that the peak rate will be over 5%. In fact, several Fed officials see 2023’s rate at 5.40% or higher.
Powell and the Fed are fully committed to getting the core inflation rate down to 2% as quickly as possible. They are clearly deeply concerned about the burden on the lower and middle classes of an inflation scenario that continues to significantly affect housing, basic food and transportation costs across the board. He hopes to see this inflation be brought down to 3.50% by the end of 2023 at which point the Fed will begin to consider a shift in its policy.
There is clearly a debate among economists about whether the 2% inflation target in reasonable or attainable within the next several years. There is a risk that Powell’s Fed will break the economy in order to attain this goal. However, for the moment, it seems that the Powell Fed is going to be true to its goal of price stability in 2023, and that we will see higher savings rates and CD rates.
I speak to lots of folks every day in my work and in my travels. These people are all very sophisticated – they are lawyers, doctors, engineers and other professionals.
It has already been four months since the interest rate environment began to change, and consumers can now easily access rates approaching 4% on savings accounts and well over 4% on short term CDs.
And, the Fed is poised to move still higher next week and possibly in February, making the opportunity to earn interest without any risk (or at least to maintain some degree of purchasing power parity) more interesting than it has been in decades (or at least since 2006). Yet, for some reason, it just isn’t apparent to all.
I am surprised when I mention that I own BestCashCow that I frequently am told with a high degree of conviction that 2% is a competitive savings rate right now (it isn’t) or that locking up money for the next 12 months at 3.50% makes good sense (it doesn’t).
As we approach year-end and the holiday season it is a good time to do a little financial “house-cleaning”. The easiest house-cleaning to do is to make sure that all of your cash is earning a competitive rate of return.
Take 5 minutes and check the leading savings rates here and short-term CD rates here. (If you want to bank locally, instead of online, then check local savings rates here and local CDs here.)
