The Federal Reserve raised interest rates by a quarter-percentage point at its meeting earlier this week, lifting the fed funds rate, a key bank lending rate, to a target range of 5.25% to 5.50%. Avid savers jumped at the opportunity for greater returns as high-yield savings accounts crept closer to five percent.
It was the 11th interest rate hike since March 2022, bringing the benchmark borrowing rate to its highest level since 2001. As the market responds to the new rate increase, money market funds could begin offering comparable rates to those of high-yield savings accounts (HYSA). Should rate watchers keep their money where it is or move on to potentially higher yields?
What is a money market fund?
A money market fund (or money fund) is a low-risk mutual fund consisting of multiple short-term securities. These funds are diversified with a mix of U.S. Treasury bills, repurchase agreements, certificates of deposit, and corporate debt. With a similar name to FDIC-backed Money Market Deposit Accounts (MMDAs), it’s easy to confuse the two. However, there’s a primary difference to note.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Money funds are regulated by the Securities and Exchange Commission (SEC), and it’s important to note that these investments are not FDIC-insured. The value of a money market fund fluctuates with market conditions even though it’s considered a low-risk investment.
What’s enticing about this investment option is that it responds quickly to the Fed’s policy changes. Since the Fed’s rates have risen again, we can expect yields on money market funds to follow suit.
Comparing Yields
In a July 25th report, Crane Data noted that the "weighted average 7-Day Net Yield for Prime Institutional money market funds was 5.16%, up 4 basis points from the previous month and up 372 basis points from 6/30/22.”
The net yields for government funds, tax-exempt retail funds, and Treasury funds also showed increases in this report. The highest-yielding institutional money fund has a seven-day yield of 5.31%, according to Crane Data.
In comparison, the highest savings accounts available currently offer rates as high as 5.17% at CFG Community Bank. Other banks have chosen to keep more modest savings rates hovering around four percent.
The yields of a money market fund could outpace high-yield savings rates, but the yield is only one part of the puzzle. Determining the best savings options also depends on factors including liquidity, accessibility, and fees.
Use the below tool — powered by Bankrate — to compare rates on high-yield savings accounts, as well as CDs, today.
High-yield savings vs. money market fund
High-yield savings accounts allow you to withdraw within reason. Meaning there’s a limit to the number of withdrawals per month. With the accessibility of an ATM or banking card, you can get cash almost instantly, and transfers within the same bank are instantaneous too.
There is a wide range of high-yield accounts without fees; for those with fees, meeting certain requirements may remove those extra costs. If the bank becomes insoluble, your deposits are insured for up to $250,000 per depositor through the FDIC.
Money market funds aren’t as easy to withdraw from, which could make them challenging to use as an emergency fund. At some banks, you may have to wait for a few days, but other institutions offer next-day funds availability. Money funds also charge an unavoidable fee called the expense ratio. If you’re seeking higher yields, this fee cuts into your potential returns.
Bottom Line
A high-yield savings account offers better liquidity, lighter fees, and valued FDIC insurance. However, money market funds could outpace the yields on a HYSA, which works well for investors looking to grow their money faster.
However, a money fund also comes with expense ratios and a longer wait for withdrawals. If you don’t foresee needing immediate access to your money, then a money market fund could be a solid investment option as long as your HYSA remains to house an accessible emergency fund.
Related Content
-
Cord Cutting Could Help You Save Over $10,000 in 10 YearsHow cutting the cord can save you money and how those savings can grow over time.
-
The '8-Year Rule of Social Security' — A Retirement RuleThe '8-Year Rule of Social Security' holds that it's best to be like Ike — Eisenhower, that is. The five-star General knew a thing or two about good timing.
-
Who Will Replace Jerome Powell as Fed Chair?Buzz is building that President Trump could announce Fed Chair Powell's replacement sooner rather than later, even though his term doesn't end until next year.
-
June Fed Meeting: Updates and CommentaryThe June Fed meeting was a key economic event, with Wall Street keyed into what Fed Chair Powell & Co. have to say about interest rates and the economy.
-
May Fed Meeting: Updates and CommentaryThe May Fed meeting came and went with little fanfare as Fed Chair Powell & Co. stuck to their data-dependent script toward interest rates amid tariff uncertainty. The May Fed meeting came and went with little fanfare as Fed Chair Powell & Co. stuck to their data-dependent script toward interest rates amid tariff uncertainty.
-
What Is the Buffett Indicator?"It is better to be roughly right than precisely wrong," writes Carveth Read in "Logic: Deductive and Inductive." That's the premise of the Buffett Indicator.
-
CPI Report Puts the Kibosh on Rate Cuts: What the Experts Are Saying About InflationCPI Consumer price inflation reared its ugly head to start the year, dashing hopes for the Fed to lower borrowing costs anytime soon.
-
Fed Leaves Rates Unchanged: What the Experts Are SayingFederal Reserve As widely expected, the Federal Open Market Committee took a 'wait-and-see' approach toward borrowing costs.
-
CPI Report Keeps the Fed on Track: What the Experts Are Saying About Inflation
CPI Disinflation in key areas of consumer prices should help the Federal Reserve stick to its policy path of gradual cuts to interest rates.
-
Blowout December Jobs Report Puts Rate Cuts on Ice: What the Experts Are SayingJobs Report The strongest surge in hiring since March keeps the Fed on hold for now.
