How Savers Can Adjust to the Fed Lowering Interest Rates
Monetary policy in the United States is dictated by the Federal Reserve, the country’s central bank. One of the Fed’s primary goals is to moderate interest rates to stabilize rising inflation and spur employment. In September, the Fed initiated a .50% rate cut in the federal funds target, the first time the Fed cut interest rates in nearly four years. Another .50% cut was made in December.
Lower interest rates may be a boon to consumers who carry balances on credit cards and to borrowers taking out new mortgages or auto loans, but falling interest rates don’t help savers who want to put money into certificates of deposit and other interest-driven savings products.
Don’t wait to take out a CD or open a money market or high-interest savings account. Interest rates are expected to fall even further, which means your money won’t work as hard in the future as it can today.
How Lower Interest Rates Affect Your Savings
Interest rates were rock-bottom at .25% to .50% beginning in 2020 due to the COVID-19 pandemic. However, in March of 2022, the Fed initiated a series of 11 rate hikes in an attempt to tame rising inflation.
The current federal funds target rate is 4.25% to 4.50%, down from a four-year high of 5.25% to 5.50%. That slightly lower rate means your money isn’t working as hard today as it was before the Fed cut interest rates.
In anticipation of the recent rate cuts, banks began lowering interest rates offered on CDs. The table below shows how falling interest rates affect returns on certificates of deposit.
3 Ways to Diversify Your Cash Savings Strategy
Savings products pay different interest rates, so it’s important to diversify and reallocate your cash savings, especially while rates remain relatively strong. Here are some tried-and-true savings strategies to consider.
CD Laddering
Laddering certificates of deposit is a common savings strategy that leverages short- and long-term CD maturity dates. You can capitalize on current high interest rates over the near term and lock in the stability of today’s higher interest rates on longer-term CDs before rates begin to tumble. The benefit of staggering maturity dates is that you’ll be able to reinvest your proceeds as CDs mature either in new certificates of deposit or other avenues.
High-Yield Savings Account
High-yield savings accounts are like regular savings accounts, but they offer substantially higher interest rates. If you have additional liquidity, moving money into a high-yield savings account allows you to reap the benefit of strong interest rates. High-yield savings accounts often work best to meet short-term savings goals when you have extra money you don’t need right now but likely will have to tap into down the line. You aren’t locked in with a high yield savings account like you are with a CD, so you can withdraw the money without incurring a penalty.
Money Market and Interest-Bearing Checking Accounts
Many financial institutions offer interest-bearing checking and money market accounts.
Money market accounts function similarly to checking accounts in that you can write checks and use a debit card against the funds in the account. However, they are deposit accounts, so you are limited to just six transactions per month. ATM withdrawals and in-person bank visits may not count, though.
Money market accounts generally offer much higher interest rates than standard savings accounts, but you’ll have to fund the account with a significant deposit – oftentimes around $5,000 at many financial institutions.
Interest-bearing checking accounts don’t have the same low transaction limits. You’ll earn more money in interest for larger balances, though most interest-bearing checking accounts have limits on what you can earn each month – and if you don’t meet minimum balance requirements, you won’t earn any interest at all.
Which Banks Have the Best CD Rates?
Many banks offer high-yield CDs, competing intensely to offer top rates. We’ve listed some of the best CD accounts to help you find ones that align with your financial goals.
Savings Strategies: Where to Shop for High-Yield Savings Accounts
Often, online banks, regional banks, and credit unions offer higher interest rates in an effort to attract more customers. Opening accounts at these institutions, which can provide more favorable interest rates due to lower overhead costs than large national banks, could lead to higher returns on your savings.
Lock in Rates While You Can
U.S. job growth exceeded expectations last year. The national unemployment rate was just north of 4% in September and remains the same now. While both are signs of a favorable national economy, the Federal Reserve still initiated the .50% rate reduction in December.
Smaller rate cuts of .25% may be forthcoming in 2025, so it’s important to take advantage of today’s current rates in order to lock in your guaranteed savings before rates fall even further. Higher rates mean higher returns on both short- and long-term CDs.
Keep an Eye on Inflation
Anyone who has gone grocery shopping in the last few years knows firsthand how much food costs have increased. Rising inflation erodes the purchasing power of dollars. It can also weaken the real returns on savings accounts and certificates of deposit, reducing the strength of savings.
The way to safeguard against inflation — currently around 2.7% — is to ensure interest earned on CDs, money market accounts, or high-interest savings accounts is higher than the inflation rate. In the summer of 2022, inflation hit a high of 9.1%. You won’t find any savings products with a corresponding interest rate, but it’s important to keep an eye on the national inflation rate and interest rates offered by banks and credit unions on savings products to know when it’s time to purchase CDs or hold your cash for times when buying becomes more favorable.
Stay Flexible and Monitor the Market
Monitoring interest rates can help savers find the best rates on savings products. Being nimble and open to moving your money around can also lead to higher returns and allow you to capitalize on the high interest rates that are still in effect.
Banks and credit unions routinely reset their interest rates on savings vehicles. Since many financial institutions are still offering exceptionally favorable interest rates on CDs, spending some time online comparing interest rates on CDs and other savings products after federal interest rate cuts can help you find new opportunities that may increase your overall returns.
Act Now to Get the Best Possible Interest Rates on CDs
Monitoring interest rates after additional Federal Reserve interest rate cuts is imperative to savvy savings strategies. Some financial institutions lower their interest rates offered on CDs and other savings vehicles in anticipation, while others intentionally keep them high in an attempt to earn new business.
No matter how interest rates swing, it’s always a good idea to be proactive about your savings and take the necessary steps to adapt to changing economic conditions. Doing so allows you to always reap the greatest rewards for your savings dollars.
