Fed Rate Hike Leaves Cash Stranded at 0.38% Interest

The Federal Reserve's recent rate hike has left many wondering where to park their cash. On September 16, the Fed raised its benchmark rate by a quarter point to a range of 3.75% to 4%, marking the first increase since 2023.

Banks responded quickly by raising the prime rate that variable credit cards and Home Equity Lines of Credit (HELOCs) often follow. However, savings rates move on a much looser schedule, largely whenever a given bank decides to compete for deposits.

The national average savings account still pays 0.38%, according to the Federal Deposit Insurance Corporation (FDIC). In contrast, some competitive high-yield savings accounts are paying around 4% or more, while top one-year Certificates of Deposit (CDs) are also available above 4%.

For federal retirees with cash sitting outside the Thrift Savings Plan (TSP) and investment accounts, this gap can add up. A $10,000 savings account at 0.38% earns just $38 per year, while a competitive high-yield savings account could earn around $420 per year.

So where should cash be parked? High-yield savings accounts and CDs held at an FDIC-insured bank receive the same protection, but differ in their rates, access to money, and any early-withdrawal penalties. Treasury bills, purchased directly through TreasuryDirect or through a brokerage, carry one advantage: their interest is exempt from state and local income tax.

For retirees who want flexibility while the direction of rates remains uncertain, shorter terms - such as a one-year CD, a six-month CD, or a Treasury bill - provide more frequent opportunities to reinvest at prevailing rates. A tiered approach can also give cash more frequent opportunities to re-price as interest rates change.