Savings accounts lost popularity as investment for more than ten years after the Great Recession because of their poor annual returns.
Bank savings accounts, however, are becoming more profitable as a result of the Federal Reserve’s historic tightening cycle, which is an effort on its part to combat inflation brought on by the COVID-19 epidemic and other factors.
Years ago, it seemed unwise to keep money in a savings account because annual percentage rates could only be guaranteed at levels below 1%. Other investing plans were more successful, though riskier.
But, annual percentage rates have increased, making them a more attractive option as the Fed drives its interest rate objective to the highest level since the turn of the century.
Not that bank savings accounts will ever serve as the main driver of a strategy for investing. According to experts in the investment sector, there are still a lot of secure alternatives to earning larger returns than through a savings account or fixed-term certificate of deposit alone.
Evergreen Bank, for instance, offers savings account rates as high as 5.25%. Hence, with that rate of return, someone who invested $25,000 would make slightly over $1,312 in interest in a single year. After a ten-year period, there would be around $16,700 in interest, increasing the $25,000 investment to $41,700.
Impact on Long-Term Investments
When rates were lower, an account would only have a 0.4% interest rate. By letting that same $25,000 sit for a year, an investor would only make a pitiful $100. That initial investment would have only increased to $26,000 if compounded over ten years.
Since the Federal Deposit Insurance Corporation guarantees all deposits up to $250,000, savings accounts are secure places to keep cash, while Mathews said that investors can also feel safe investing in T-bills.
Since the beginning of the year, inflation has significantly decreased, with the consumer price index clocking in at just over 3% — still above the Fed’s 2% target but much lower than the sky-high 9% levels it was reaching last summer. And a pause is anticipated by the markets.
The CME Group’s FedWatch tool, which determines the likelihood of where rates will be in the future using futures contract prices for rates in the short-term market the Fed is targeting, can be used by investors to get information.
93% of investors predict that the Fed will pause at its upcoming meeting in September. But things become a little more complicated after that.
After the Fed’s meeting in November, over 46% of investors predict that rates will be higher than they are currently, and just over 40% predict that rates will be higher than they are now when we reach 2024.
3.5% of investors even predict that the Fed will have cut rates by that time.