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3 smart money moves you can make now that the Fed cut interest rates

Sam Becker@smbecker
Twenty/20

The Federal Reserve just lowered interest rates for the first time in more than a decade.

The rate cut is small, only 25 basis points, which means just a quarter of a percentage point, but it's significant because it's the first cut since 2008, and because the U.S. central bank, known as the Fed, is raising concerns of a global economic slowdown.

Here are a few smart money moves experts suggest you make after a rate cut.

1. Check the rates on your emergency fund

Consider any change in interest rates a nudge to make sure you're getting a great deal on your savings account balances.

Greg McBride, chief financial analyst at Bankrate, told Grow earlier this year that the slow rise of rates over the past several years have helped people with money in the bank earn pretty good returns over that time, so "one or two rate cuts isn't going to change" that reality: "Savers are far ahead of where they were a few years ago."

Some banks have already lowered interest rates slightly on their online savings accounts, and more are likely to follow now that the Fed has reduced its benchmark rate. Even so, top savings accounts are currently offering as much as 2.09%—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.

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2. Consider locking in higher rates

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, Justin Halverson, a financial advisor at Great Waters Financial in Minnesota, told Grow earlier this year. 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.

3. Target debt repayment

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.

What lower interest rates can mean for you

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, which 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.

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 earn a little less in interest.
  • 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. Markets actually dropped a bit Wednesday, though, after Federal Reserve Chair Jerome Powell hinted in remarks that further rate cuts this year are not a sure thing.

While 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.

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