The Federal Reserve lowered the federal funds rate by half a percentage point at its September meeting, the first time it has lowered rates since the start of the pandemic in March 2020. Banks and credit unions will soon start lowering their own rates in response to the Fed’s move.
When interest rates fall, you may feel uneasy about the impact on your savings. But rather than panicking, think of this as a chance to evaluate your financial strategy.
“Changing economic environments are a good time to evaluate one’s portfolio of savings and investments,” says Rosalyn Glenn, financial planner with Prudential Advisors.
With the Federal Reserve making a rate cut, you should understand how changes in interest rates affect your savings. A rate cut may translate to smaller returns on savings accounts and certificates of deposit, so it’s a good time to evaluate your savings strategy to ensure your money works hard, even in a low-rate environment.
[See: Best High-Yield Savings Accounts]
What Does a Fed Rate Cut Mean for Savers?
The annual percentage yield on your savings account may decrease after a Fed rate cut. If you’re opening a new CD, expect the rate to be lower than offers you may have seen before the Fed rate cut.
The federal funds rate is essentially the interest rate banks charge each other for overnight loans. It acts as a benchmark for the rates offered to customers. When the Federal Reserve changes the federal funds rate, it influences rates on financial products such as mortgages, personal loans, CDs and savings accounts.
“Banks generally raise or lower consumer rates based on what it costs them because they want to maintain the spread between what they’re charging borrowers and paying depositors,” says Glenn.
Cutting the Fed rate leads to lower rates across these products, stimulating the economy by reducing the cost of loans but lowering returns for savers.
[Read: Best CD Rates.]
How Quickly Will the Rate Change Impact Savings and CDs?
Each financial institution responds to rate changes individually, so predicting when a Fed rate change will hit your account is tough. Some financial institutions adjust promptly in response to rate changes, while others may take longer to change or not change at all.
“Banks often adjust rates on savings accounts and CDs within a few days or weeks following the Fed’s announcement, sometimes even adjusting rates downwards in advance of an anticipated rate cut,” says Gary Zimmerman, founder and CEO of MaxMyInterest.
While rate changes among banks may vary, there will be a downward trend after a Fed rate cut.
Don’t expect an immediate, steep decline in interest rates because of the fierce competition among digital banks, says Jamie Strayer, creator and executive producer of “Opportunity Knocks” on PBS, a show about personal finance and economic mobility.
But Strayer says now is a good time to lock in any cash you have ready for a long-term CD. “The smart move is to act before rates start sliding,” she says.
How to Protect Your Savings Amid a Fed Rate Cut
Falling rates can dampen interest earnings, although your deposits aren’t at risk in an FDIC-insured account. Still, you can miss out on earnings if you’re not seeking the best place for your money and adopting strategies to maximize your returns, especially when rates drop. CD laddering, shopping for high-yield accounts and choosing accounts that still earn well in a low-rate environment can keep your savings growing.
“In a low-rate environment, the smartest move is to put your money where it works hardest for you,” says Strayer. “Online banks and credit unions are your best bet.”
[Read: Best Online Banks.]
CD laddering can give you flexibility as interest rates change. With a CD ladder, you open multiple CDs with different maturity dates. With CDs maturing at different intervals, you can choose the best investment for your funds as they become available. You can reinvest at potentially higher rates if the environment improves or keep some of your funds locked into high rates before they fall further.
“Savers would be wise to keep an eye on interest rates and be ready to move their funds to whichever banks are willing to pay the highest yield,” says Zimmerman. “Since FDIC-insured savings accounts are largely a commodity, it pays to shop around to make sure that you’re always earning the best rates.”
High-yield savings accounts offer the most competitive savings rates. Usually offered by online banks or credit unions, these accounts provide better interest rates because they have lower overhead costs than traditional banks. If you have a savings account with a traditional bank, compare the interest rate to a high-yield savings account to see if you can earn more.
Even if you have a high-yield savings account, you should still shop around to confirm whether your bank has the best rates and be ready to move your funds if you can find an account that earns more.
Diversifying your savings can also help you find the best rates, Glenn says. “While diversifying doesn’t necessarily ensure growth, it offers the best opportunity for growth. Using various investments — cash, equities, bonds — helps to navigate interest rate risk,” she says.
In addition to CDs and high-yield savings, consider investments such as bonds, stocks and real estate investment trusts that may offset lower savings and CD returns.
“When interest rates start to fall, don’t let your money just sit there,” Strayer says. “High-yield accounts from online banks and credit unions are a great start but it’s essential to think about balancing diversification with risk tolerance. If you want to beat inflation and declining rates, you’ve got to think beyond just savings accounts.”
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How to Prepare Your Savings for Falling Interest Rates originally appeared on usnews.com
