The Federal Reserve announced the second rate cut of the year on Wednesday, reducing its funds rate from 2% to 1.75%. While the decrease is considered moderate by most equity investors, it could actually have a significant impact on people with cash or longer-term fixed savings accounts.
The federal funds rate influences commercial banks and their decision making, so interest rates will decrease across the board. Here’s what it could mean for your savings accounts, and how you can make the most of the current economic climate.
New Certificates of Deposit will Pay Less Interest
Certificates of Deposit (CDs) are low-risk investment savings accounts that can provide moderate returns over fixed periods. If you currently have money saved in a CD, you will be protected from any rate changes during your term.
However, if you are considering a CD today, you will have to shop around to find a competitive rate. You can lock your money into a two, three, or even five-year term, protecting it from future interest rate decreases. The return won’t be as strong as in recent years, but you’ll at least be shielded from rate volatility.
It is expected that the Fed will drop interest rates again in the final quarter, so finding a competitive CD should be your priority as we move towards the holiday season.
Shop Around for Cash Savings Accounts
Don’t let your cash stagnate if you have it saved in a non-term account. General cash savings accounts typically come with lower interest rates than CDs, but they are more flexible because you can access your money when you need it.
The key here is to monitor the savings interest rate at your current bank, and always keep up to date with competing accounts from other institutions. Even with lower interest rates, banks will still compete with value incentives, lower fee structures, and other perks.
Cash savings are fluid so it is never a bad idea to move your money to an account where you will get the best benefits.
Most importantly, don’t overreact to interest rate changes. Certificates of Deposit may not be as exciting or rewarding as the current bull market in stocks, but you will always have a guaranteed return. Even standard cash savings accounts with lower interest rates will provide the security of knowing that you have funds available for emergencies and unexpected bills.
The stock market remains an excellent option to grow your wealth over time, but cash and long-term savings should always be a significant aspect of your financial portfolio.
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