Smart Ways to Earn More on Savings After a Fed Rate Cut

For the first time since March 2020, the Federal Reserve is poised to lower the federal funds rate this week. This expected rate cut may be the first of several that could happen before the year’s end. A rate cut from the Fed often comes as good news for individuals and businesses alike, particularly for those looking to borrow or refinance. Lower interest rates mean more affordable loans, making it easier to purchase a home, finance a car, or pay off existing debt. However, these rate cuts also come with downsides, especially for savers and those relying on interest income from bank accounts or certain investments.

With the Federal Reserve reducing interest rates, it’s a perfect time to reassess where you keep your savings and find ways to maximize your interest earnings in a lower-rate environment.

What Happens When the Fed Lowers Its Target Rate?

A cut in the federal funds rate can have broad implications for both borrowing and saving. Here’s a breakdown of what to expect when the Fed decides to reduce interest rates:

1. Loans: If you have a fixed-rate loan, such as a mortgage or auto loan, nothing will change as your interest rate is locked in for the term of the loan. However, if you plan to take out a new loan or refinance an existing one, the interest rates will likely be lower. This means borrowing money will cost less in terms of accrued interest, and your monthly payments could be reduced, making loans more affordable.
2. Bank Accounts: Interest rates on deposit accounts, such as savings accounts and checking accounts, tend to decrease following a Fed rate cut. As a result, the annual percentage yield (APY) you earn on your bank deposits will shrink, meaning your cash in the bank will earn less interest over time.
3. Low-Risk Investments: For those with low-risk investments like certificates of deposit (CDs) or Treasury bills (T-bills), existing investments won’t be affected by a rate cut since their rates are locked in at the time of purchase. However, future CDs and T-bills will offer lower yields. This makes it essential to lock in higher rates before further rate reductions.

Given these changes, it’s important to reevaluate your savings strategy to ensure you’re making the most of your interest-earning opportunities in the face of falling rates.

How to Maximize Interest Earnings After a Rate Cut

While a Fed rate cut is typically conservative, and the effects on interest rates may be gradual, it’s essential to act sooner rather than later to optimize your savings. Here are some steps to consider:

1. Choose a High-Yield Bank Account

For your everyday expenses and emergency savings, keeping your money in a bank account is essential for liquidity and penalty-free access. However, as banks lower the interest rates on deposit accounts, you’ll want to shop around for better APYs. High-yield checking and savings accounts, particularly those offered by online banks and credit unions, often provide better returns than traditional bank accounts.

Consider moving your funds to:

• High-Yield Checking Accounts: These accounts often offer higher interest rates and some degree of liquidity.
• High-Yield Savings Accounts: These online-only accounts generally offer higher APYs than brick-and-mortar banks.
• Credit Union Accounts: Credit unions often provide competitive rates compared to traditional banks.

2. Lock in Rates with CDs

If you have funds that you won’t need in the near future, now is an excellent time to transfer them into a certificate of deposit (CD). CDs allow you to lock in interest rates, potentially as high as 5%, before they drop further. The key is to compare rates and choose longer-term CDs that will preserve your higher rate even if additional rate cuts occur.

This strategy is particularly advantageous for those saving for a large expense like a home down payment. By securing a high APY in a CD, you can grow your savings while waiting for mortgage rates to decrease. If flexibility is a concern, consider a CD laddering strategy, which involves opening multiple CDs with staggered maturity dates to ensure you can access your funds at various intervals.

3. Invest in Treasury Bills

Like CDs, Treasury bills (T-bills) are another low-risk option that allows you to lock in rates before they decline. Current T-bill yields are hovering around 5%, but the upcoming Fed rate cut could lower these rates. Before purchasing T-bills, compare them with CDs to determine which option offers the best returns for your situation. Additionally, T-bill earnings are exempt from state and local taxes, which can be an added benefit for some investors.

4. Rebalance Your Long-Term Portfolio

As interest rates fall, low-risk assets like savings accounts and bonds will yield lower returns. To maintain or exceed your current earnings, you may need to accept more risk by reallocating funds to your stock portfolio. While rate cuts often stimulate the stock market, the effects on equities can vary. Some experts recommend focusing on stocks more sensitive to rate cuts, such as real estate investment trusts (REITs) and small-cap stocks.

Although these investments carry a higher risk than fixed-income options, they can provide opportunities for growth, particularly if the stock market responds positively to the Fed’s actions. However, patience is crucial, as it can take time for the market to adjust fully to new interest rate environments.

The Federal Reserve’s upcoming rate cut offers both challenges and opportunities for savers and investors. While borrowing costs will decrease, interest income on savings accounts and low-risk investments will likely decline as well. By taking proactive steps, such as moving funds to high-yield accounts, locking in rates with CDs or T-bills, and rebalancing your investment portfolio, you can maximize your interest earnings even in a lower-rate environment.