The days of 5 percent savings appear numbered

Last April I opened a certificate of deposit with Marcus, the online bank of Goldman Sachs. The one-year rate was 4.75 percent. Right now I could lock in another 12 months at 5 percent. Meanwhile, my Marcus savings account is yielding 4.5 percent, up from 0.5 percent when I opened it three years ago.

The high interest rates the Federal Reserve unleashed to rein in inflation have been painful for consumers and businesses. But there’s been a silver lining: the steepest yields on CDs, money market mutual funds, and other interest-paying investments since the mid2000s.

For the past eight months the Fed has held its benchmark rate between 5.25 percent and 5.5 percent — the peak of this credit tightening cycle. While it’s taken longer than forecasters previously expected, the day when the central bank starts cutting borrowing costs is, as they used to say, nigh.

Plan accordingly.

The news: On Wednesday, Fed policy makers wrapped up their fifth straight meeting without adjusting rates. But in fresh economic projections, they signaled two or three quarter-point rate cuts this year, basically sticking with their outlook in December.

In a news conference, Fed chair Jerome Powell wouldn’t be pinned down on when the first reduction might come. He said he and his colleagues wouldn’t act until they were more confident that inflation was headed back to their 2 percent target. After cooling dramatically from a four-decade peak in 2022, inflation ticked up in January and February.

“It’s going to be a bumpy ride,” Powell said. “That is why we are approaching this question [of when to cut rates] carefully.”

What it means: Absent a surprise spike in prices, the Fed will within months begin rolling back the 11 increases it made from March 2022 to July 2023. Investors on Wednesday put the odds of an initial rate cut in June at 75 percent, based on the CME Group’s FedWatch tool, up from about 50 percent the day before.

Some banks have already started lowering their rates in anticipation. The average 1-year CD yield is 5 percent, compared with 5.2 percent in February, according to DepositAccounts.com. The average high-yield savings account rate has dipped to 4.44 percent from 4.49 percent last month, though deals above 5 percent are still being advertised.

Yields on money market mutual funds averaged 5.14 percent last week, according to Crane Data, down from 5.2 percent at the end of December.

Note: CD rates are guaranteed for the term of the contract. Online savings and money market fund yields will change quickly.

Caveat: Last year many forecasters expected the Fed would cut rates before now. But policy makers have been steadfast: easing credit prematurely could backfire.

“We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation, and ultimately require even tighter policy to get inflation back to 2 percent,” Powell told reporters. Investors are betting on June, and stock prices took off after Powell spoke. But there’s no guarantee on timing.

Final thought: The Fed is in a pretty good spot.

Pressure to cut rates would be greater if the economy was showing signs of weakening. But the economy is healthy; the central bank bumped its forecast for growth this year to 2.1 percent from 1.8 percent in December. Unemployment stood at 3.9 percent in February, just below the Fed’s forecast of 4 percent in 2024.

Savers still have time to take advantage of today’s hefty yields. Just don’t wait too long.