When the Federal Reserve cuts interest rates, it’s good news for borrowers and consumers, but not so much for savers. The Fed’s recent quarter-point rate cut is a reminder that the annual percentage yields (APYs) on savings accounts and certificates of deposit (CDs) tend to fall soon after. This means you may need to adjust your savings strategy. Here’s how to keep your money growing when rates start dropping.
Why Savings and CD Rates Fall After a Rate Cut
When the Fed lowers interest rates, it becomes cheaper for banks to borrow money. As a result, they don’t need to be as competitive to attract deposits, so they tend to lower the interest they pay on savings accounts and CDs. That’s why you’ll often see your APY drop soon after the Fed makes a rate cut. In short, banks follow the tone set by the Fed.
Stick with a High-Yield Savings Account
Even when rates fall, high-yield savings accounts still offer better returns than traditional savings accounts. And if you want quicker access without the early withdrawal fees of CDs, a high-yield savings account is the way to go. Though these accounts have variable interest rates, you’ll want to look for one that earns at least 4% APY, has no monthly fees or minimum balance, and allows quick transfers between checking and savings.
The Fed is expected to make further cuts, so your earnings could dip slightly, but high-yield savings accounts are still safe and flexible accounts for emergency funds and short-term savings.
Lock in a CD Before Rates Drop Further
Assuming you have a robust and easily-accessible emergency fund and you’re wanting to set aside some separate funds that you don’t intend to touch for a while, consider locking in a CD now. CDs offer fixed interest rates, so if the Fed does make more rate cuts, you won’t be affected.
If you’re new to CDs, here are a few tips:
- Start small and short-term. If you’ve never used a CD, try one with a shorter maturity, like three or six months, to see how it fits your budget. A CD maturity is the date when it reaches the end of its fixed term. You have a grace period to decide if you want to renew it, withdraw the funds, or transfer them to another account without penalty.
- Watch for early withdrawal penalties. The longer the CD term, the bigger the penalty if you withdraw early. A five-year CD, for example, might cost you six months to a year of interest if you break it early.
- Avoid auto-renewals. Many banks automatically renew CDs when they mature. Set a reminder sometime before the end date so you can decide whether to reinvest or move your money elsewhere.
- Prioritize your goals first. CDs aren’t made for quick access, so they make the most sense once you’ve built a solid emergency fund.
When the Fed cuts rates, it’s natural for savings and CD earnings to slip, but you can keep your money moving in the right direction by staying flexible and adjusting your savings strategy as rates change.
