The silver lining of the Federal Reserve’s interest rate increases

I have never been a morning person. When the alarm on my trusty clock radio sounds, I usually hit the snooze button and listen to the news for a bit before I get out of bed to face the day. While lingering under the covers recently, I heard an advertisement that made me smile.

One of our local banks in the New York area was peddling a product called a “bump-up” certificate of deposit. These CDs typically offer savers a fixed return for a defined period that can be increased one time if interest rates keep heading higher.

I liked what I heard, and not because I’m necessarily a bump-up proponent. Consumers choosing these products can expect to sacrifice a little yield at the start for a chance to earn more later. What I found encouraging was that someone in finance was finally competing for people’s cash.

One of the unfortunate consequences of the Federal Reserve’s zero-interest rate policies — imposed first after the financial crisis and then again during the pandemic — has been the impact on humble savers. They have been punished, their returns ground into dust. Watching your interest compound at a government-insured savings institution has become as quaint a memory as dialling a rotary telephone.

That has been changing this year as the Fed has begun raising rates to hold down inflation. Big bank customers are unlikely to benefit much because those lenders are awash in deposits and lock in much of their clientele with auto-pay options and other conveniences. But some of their competitors are offering better deals.

Yields on money-market mutual funds climbed above 2 per cent this week for the first time since July 2019, says Peter Crane, chief executive of Crane Data, who added that returns of about 5 per cent were the norm in the decade or so before the financial crisis.

Bankrate.com shows US banks with savings accounts promising annual percentage yields of 2 per cent or more. Marcus, Goldman Sachs’ consumer arm, is offering a one-year CD with a 2.7 per cent APY and a 20-month bump-up CD at 2.5 per cent, according to the website.

“Yields have really moved up pretty substantially this year,” says Greg McBride, chief financial analyst at Bankrate.com. “At the beginning of the year, the top-yielding bank savings accounts were a little over half a per cent.”

Viewed as a conventional investment, cash brings to the mind the old Woody Allen joke: Sex without love is an empty experience, but as empty experiences go, it’s one of the best.

With US inflation running north of 8 per cent, accepting a return of 2 per cent or thereabouts obviously isn’t a great idea. But it hasn’t been the worst idea this year, either. Cash has outperformed stocks, bonds, bitcoin, dogecoin, copper, lumber — any number of assets apart from that Mickey Mantle baseball card that just fetched $12.6mn.

The smart money has responded. A Goldman Sachs analysis of mutual funds holding $2.7tn in equity assets found they “increased their allocation to cash this year at the fastest rate” since the financial crisis. During the first half of the year, cash went up from 1.5 per cent of portfolios to 2.4 per cent, or $208bn, it said.

Bob Haber, chief investment officer of Boston-based Proficio Capital Partners, a “safety first” manager that handles $3bn for 25 families, went even further. With a strategy focusing on equities, investment-grade bonds, precious metals and cash, he says he put about 30 per cent of his portfolio this year into cash and “near-cash” instruments such as shorter-dated Treasuries. “This year, everything but cash went into a bear market and continues to be in a bear market,” he adds.

That said, for individual investors, cash holdings often play a different role than other assets. Their cash is rainy day money, or as McBride puts it, “the buffer between you and 18 per cent credit card debt thanks to an unplanned expense”.

Many of us have such worries — and for some they are more pressing. Tens of millions of people in the US struggle to maintain a sufficient financial cushion. A Bankrate.com survey in June revealed that 23 per cent of Americans had no emergency savings, while another 28 per cent had some savings, but not enough to cover three months of expenses.

As painful as the Fed’s rate rises will be for the US economy, they also promise to provide a little yield and maybe a modicum of comfort for an often-forgotten set of savers — the worried, the beleaguered, the people who just want to put their head on the pillow and get some sleep at night.

gary.silverman@ft.com