Have you seen a dip in your savings interest rate? Don’t be too surprised: for the first time in over a decade, the Fed cut interest rates by a quarter of a percent, bringing interest rates down to 2.00%-2.25%.
The move is good news for borrowers and even investors. Lower borrowing costs can continue record-breaking housing marketing over the past several years and spur consumer spending to keep our economy healthy.
But what does it mean for your savings account and personal finances? Simply put, interest rate cuts also means banks are paying us less to hold our money for us.
Here’s a quick overview of Fed rate cuts and what you can expect moving forward.
Why the Feds Cut the Interest Rate
While trade wars with China are raging on, the U. S. economy is still holding strong. The housing market is still hot across much of the country, though some areas are starting to see it cool down.
Still, some consumers and economists fear that a recession may be on the horizon. Falling stocks, a weakening global economy, and the simple fact that we’ve been in an economic expansion for the past 10 years have many worrying that we’ve nearly reached the end of this period of prominence.
Typically, when the Fed cuts interest rates, it’s to stimulate the economy and increase spending. The lower borrowing costs make loans more accessible and financially feasible for borrowers, encouraging them to spend. But the savings for some can come at a cost for others, and saving accounts usually take the first hit.
How Interest Rate Cuts Affect Consumer Finances
Depending on what side of the fence you’re on, fed interest rate cuts can help or harm your finances. If you plan on buying a house or car or making some other large purchase, now would be the time to do it. Interest rates are low, and you’ll pay less in the long run.
However, if you have a traditional or online savings account, you will likely see a drop in your interest earnings. Banks will typically lower the interest rate on savings accounts and new CDs, though the rate cut may take a few weeks to affect these accounts.
Taxable money market funds tend to align with the fed, so you may see a similar decline in interest rate.
There’s some good news for savers, though. If you’ve invested your money in a CD, you’re locked into that rate until the CD matures. Also, if you have variable credit card interest rates, you will likely see a decrease in the amount of interest you pay.
Experts are predicting that we’re not in for a long series of rate cuts, but there could be anywhere from one to three more before the end of the year. Even if talk of trade war quietens, it’s unlikely the Fed will reverse its rate cuts so quickly.
If you want to continue getting the most for your money, long-term CDs and high-yielding online savings accounts look to be the best options. Online banks only dropped their interest by 10 basis points when the Feds cut interest by 25 basis points. Online banks can still afford to offer higher interest rates because they don’t have the overhead and other costly complications that traditional banks do.
What to Do Next
The Fed rate cut was a modest one, and many experts agree it won’t have much of an impact on your finances for better or for worse.
However, because the interest rates dropped, now might be a good time to start reducing your debt. Take advantage now while rates are low because they will rise again at some point, and when they do, you can at least be prepared with a lighter debt load.
Hope this helps!
Got questions? Feel free to post them below and I’ll be happy to cover them in an upcoming blog post or Facebook Live ?.