Fed nudges savings rates higher

Cash is starting to get a bit less trashy.

The Federal Reserve nudged short-term interest rates on June 14, and rates on short-term savings vehicles have started to reach levels that are almost compelling.

The Fed raised its target level for fed funds to 1% to 1.25%, a 0.25% increase. Not surprisingly, the prime rate jumped almost immediately to 4.25% from 4%.

Some banks are now offering CDs with yields as high as 2.35%, according to Bankrate.com. Synchrony Bank, for example, now offers a five-year CD yielding 2.35% with a minimum of $25,000. Early withdrawals can result in up to 12 months’ interest on the amount withdrawn.

Other banks hitting the 2.35% mark include Ally Bank and Goldman Sachs Bank.

While no one is going to get rich on 2.35%, it’s more than inflation, currently 1.9%, and more than investors would earn on a 10-year Treasury note. (To be fair, T-note interest is exempt from state income taxes). Those rates are also higher than the dividend yield on the Standard & Poor’s 500 stock index.

Other savings rates have risen as well. Average money market fund yields rose to 0.57% on June 20 from 0.47%, according to iMoneyNet. That’s not much. But several large institutional money funds, such as Dreyfus Cash Management Institutional (DICXX) and Western Asset Institutional Cash Reserves (CARXX), now yield 1.12%. The top-yielding institutional money market fund, Morgan Stanley Institutional (MPUXX), yields 1.13%, according to Money Fund Intelligence.

Bank money market accounts remain competitive with money market funds. Goldman Sachs offers a money market account yielding 1.2%, and BankDirect offers one yielding 1.16%.

Related Topics: Federal Reserve