For the first time since March 2020, the Federal Reserve lowered the federal funds rate last week — and there may be more cuts later this year.
Rate cuts can be cause for celebration, particularly if you’re planning to buy a home or pay off debt. But you can also expect to earn less interest on bank deposits and some investments. In other words, now is a good time to reevaluate where you keep your savings and look for ways to maximize your interest earnings.
What happens when the Fed reduces its target rate?
Interest rate reductions have several implications when it comes to banking and borrowing money. Here’s what you can expect after a rate cut from the Fed:
Loans: If you have a fixed-rate loan, nothing will change. However, if you want to take out a new mortgage or car loan, for example, or refinance an existing loan, the annual percentage rates (APRs) offered by lenders will be lower. As a result, it’s more affordable to borrow money since you’ll accrue less interest and monthly loan payments may be lower too.
Bank accounts: The annual percentage yield (APY), or interest you earn on bank deposits, decreases. As a result, you’ll earn less on the cash you keep in your checking and savings accounts.
Low-risk investing: If you already have an investment account that gives you guaranteed returns, such as a certificate of deposit (CD) or Treasury bill, your rate will stay the same. However, the rates offered on new accounts will begin dropping.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
How to maximize interest in light of falling rates
The upcoming Fed rate cut is expected to be conservative, so you may only see gradual changes to your interest rates in the short term. However, more cuts are likely to come, so now is a great time to lock in high rates and prepare your next steps.
Choose a high-interest bank account
For your day-to-day cash and emergency savings, it’s best to keep the money in the bank, since you need to maintain easy, penalty-free access to your funds.
But as banks reduce the interest rates offered on deposit accounts (which they can do at any time), your balances will earn less. As a result, you’ll want to check the APY on your bank accounts and shop around to see if you can earn a higher rate elsewhere. Here are some bank accounts that might earn more than your regular checking or savings:
Read more: How do banks set their savings account interest rates?
Open a CD now
When it comes to money you don’t plan to use within the next few months, consider moving it out of your savings account and into a CD right away. By doing so, you could lock in 5% APY or higher before rates take a hit.
In addition to comparing rates, look for CD accounts with longer terms, since the goal is to retain your high rate long past any future rate cuts.
This strategy is particularly useful for anyone who’s been saving for a down payment on a home. By moving your savings into a CD, you can lock in a high APY while…
Read More: How to maximize your interest earnings following a Fed rate cut
