Wall Street has been betting that the Federal Reserve will lower interest rates this month.
The Fed is tasked with keeping our economy healthy. Part of how it does that is by setting a benchmark interest rate called the federal funds rate. That influences the rates banks charge you on credit cards, mortgages, and other loans, and what kind of interest they offer on products like savings accounts and certificates of deposit.
The current federal funds rate is 2.5%. The U.S. central bank, aka "The Fed," increased it four times during 2018, but hasn't made any changes since December.
For consumers, this is what generally happens when rates are cut:
- It becomes cheaper to borrow money, as consumers will pay less in interest.
- Those with money in savings will see a smaller yield, or earn less in interest on their balance.
- The value of your investments may go up as even the hint of a rate cut tends to lead to a surge in stock prices.
Though Wall Street generally celebrates a rate cut, those cuts have pros and cons for ordinary consumers. Lower rates create incentives for people to borrow and spend money, rather than save or invest it.
When it comes to the money you're stashing in your bank accounts, a rate cut won't make that much of a difference. "Savers are far ahead of where they were a few years ago," says Greg McBride, chief financial analyst at Bankrate, explaining that the slow rise of rates over the past several years have helped people with money in the bank earn decent returns over that time. "One or two rate cuts isn't going to change [that]."
Even so, some smart maneuvering can help you make the most of your cash:
Consider any change in interest rates a nudge to make sure you're getting a great deal on your savings account balances.
Some banks are already lowering interest rates slightly on their online savings accounts in anticipation of a rate cut, and more are likely to follow if the Fed does reduce its benchmark rate. Even so, top savings accounts are currently offering as much as 2.08%—more than seven times the national average of 0.28%, according to DepositAccounts.com.
If you haven't considered moving your emergency fund to an online bank, which tend to have higher interest rates, now may be a good time to do so.
If you have savings other than your emergency fund that you don't anticipate needing in the short term, look at other options that can offer you higher rates, says Justin Halverson, a financial advisor at Great Waters Financial in Minnesota. Those might include a certificate of deposit, bond funds, or even high-rate savings accounts that require a minimum balance in the thousands of dollars.
Banks agree to give depositors higher interest rates on high balances in exchange for parting with more of your money, meaning that you end up earning more interest when you have more cash in the bank. So, the higher rate you lock in, the more you stand to earn in interest.
Falling interest rates can mean you're paying less in interest on debts that have variable rates tied to or influenced by the federal funds rate. Those can include credit cards, some mortgages, and private student loans, for example.
So any extra cash you have to put toward those debts can add momentum—more of your money goes to paying down the balance, and you can end up debt-free a lot faster.
Rate cuts are in the news because earlier this week in testimony to Congress, Fed chairman Jerome Powell gave more hints that a rate cut is coming. "It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook," Powell told members of the House Financial Services Committee.
If the Fed does cut interest rates, it would be the first time it has done so since the financial crisis, and it would mark a change in plans. Fed chairman Jerome Powell previously said he planned to leave rates at current levels until 2021.
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