How to Boost Your Savings Even When the Federal Reserve Cuts Rates

There are ways to maximize your savings even when the Federal Reserve cuts interest rates. Pickadook/Shutterstock

Even though inflation came in at 2.7 percent year over year in November, many economists expect the Federal Reserve to cut interest rates by 0.25 percentage points at its December policy meeting.

So why does this matter to those looking to save?

When the Fed slashes interest rates, banks tend to ease their lending rates to attract borrowers and remain competitive. But this could also trigger a ripple effect across other banking products such as savings accounts.

From a consumer perspective, lower interest rates on loans are beneficial. But it could also mean you won’t earn much on your savings account.

Still, there are ways to maximize your savings even when the Fed cuts interest rates. So let’s take a look at your options.

Compare High-Yield Savings Accounts

A high-yield savings account typically pays a higher rate than a traditional savings account.

Even in November, when the Fed cut interest rates for the second time this year, savvy consumers were earning as much as 5 percent through high-yield savings accounts.

That dwarfs the national average savings account rate of 0.43 percent. Many high-yield savings accounts are offered by online banks. One reason is that online banks don’t have the same overhead expenses as their traditional brick-and-mortar counterparts, so they can pass on some of these savings to consumers.

And unlike the established big banks, many online banks are part of younger financial technology (“fintech”) companies actively looking for new deposits to stay competitive. So they may be more likely to offer higher than average interest rates on their savings accounts.

But don’t just go with the first high-yield savings account that pops up in your search engine. Make sure you analyze and compare your options to find one that works for you.

Try keeping an eye out for minimum deposit requirements. Some banks pay interest rates on a tiered basis. So you may need to have as much as $10,000 in the account to earn the bank’s highest rates. A competitor may give you that rate on any amount you deposit.

Moreover, some banks may require you to maintain a minimum balance to earn the highest rate and avoid fees.

In general, you should look for high-yield savings accounts with no fees and no minimum balance requirements.

But liquidity is also something you should pay attention to. Most savings accounts aren’t tied to debit cards. So make sure your bank can transfer money into your checking account in a time frame that works for you.

Look Into Money Market Accounts

A money market account (MMA) tends to pay higher interest rates than traditional savings accounts. The average rate for a money market account is 0.60 percent. But you can still find MMAs that pay as much as 5 percent.

And there could be more. Some money market accounts come with debit cards. This allows you to tap into your emergency fund by simply using an ATM.

And don’t worry if you got your MMA through an online bank. Even though they don’t have any physical branches, many online banks are part of large ATM networks. And you could use your banking app to locate one near you. These are typically found in places such as supermarkets, pharmacies, and eateries.

But here, too, it’s important to do your homework. So make sure you pay attention to rate terms, fees, minimum deposits, and minimum balance requirements.

And a note of caution for those looking for debit cards tied to their MMAs: Savings accounts are designed to be used as emergency funds. So if you’re the kind of person who has trouble controlling their discretionary spending, having a plastic debit card tied to your emergency fund may not be the best idea.

Lock In a High CD Rate

If you have at least six months’ worth of expenses stashed in a liquid high-yield savings account or MMA, you may want to consider boosting your savings with a certificate of deposit (CD).

A CD is a type of deposit account that allows you to lock up your money for a set amount of time from around three months to five years in exchange for a higher interest rate than an average savings account.

But CD yields tend to fall as the Fed cuts rates. Still, some CDs today are paying as much as 4.5 percent. So now may be a good time to lock in a high rate on a CD that meets your needs.

So how do you decide? You can start by looking at the term or amount of time you’d be locking away your money.

Make sure you are comfortable with socking away your deposit for the set term. Most banks will charge you a penalty for withdrawing your money from a CD before its term ends.

But there are other restrictions like minimum deposit requirements. These can be as low as $0 or as much as a few thousand dollars. Minimum deposits for Jumbo CDs can go above $100,000.

Jump Into the Stock Market

When the Fed cuts interest rates, it theoretically makes it easier for companies to borrow money. This could allow them to grow their business and innovate, potentially boosting their revenue and returns for stockholders.

Following Donald Trump’s victory in the November election, the stock market rallied to historical highs. And many analysts saw continued optimism in the stock market following the latest Consumer Price Index (CPI)—a common measure of inflation.

“CPI results are flashing a green light to equity investors clapping their hands while yelling Santa Claus,” said José Torres, senior economist at  Interactive Brokers, in an email sent to media outlets. “The enthusiasm is also extending to fixed income as rate watchers cement another 25 basis-point trim from the Fed next week in response to the well-received inflation figures.”

But it’s important to carefully research stocks. If you’re new to investing, you may also want to consider mutual funds and exchange-traded funds (ETFs). These are baskets of different stocks, which offer instant diversification. Many ETFs and mutual funds are also designed to reflect the performance of a market index like the S&P 500 Index, which contains the largest publicly traded companies in the United States.

So far, the S&P 500 is up nearly 30 percent for 2024. The index has delivered an annualized total return of 16 percent over the last five years and an average annual return of 10 percent over the last 30 years, according to research by Goldman Sachs.

The Bottom Line

To make the most of your savings and investments, you should aim to at least beat the rate of inflation. So today, you’d want to aim for a rate above 2.7 percent to maximize your purchasing power. With careful research, you could find high-yield savings accounts, MMAs, CDs, and securities that pay nearly double that.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.