Where to move your money when interest rates are poised to fall
2024-09-13 12:00:31
With the Fed poised to cut interest rates next week, the ripple effect will show up in certificates of deposit and high-yield savings accounts, which currently offer rates of more than 5%.
They aren’t likely to fall dramatically following a rate cut but rather ease back closer to 4% and linger above the inflation rate for at least the next year. So these accounts should still be your go-to for your emergency fund or cash set aside for short-term expenses.
That said, the Fed’s anticipated action offers an opportunity to make some money moves that take advantage of the downward tilt in interest rates.
“The projected cutting may pull the rug from under the high-yield savings rates,” Preston D. Cherry, founder and president of Concurrent Financial Planning, told Yahoo Finance. “Now might be the best time we’ve seen in a few years to swap cash in high-yield savings for long-term bonds to lock in a higher yield for income payments for lifestyle and retirement portfolios.”
Since 2022, when the Fed began to raise short-term interest rates, bank savings accounts have been a better place to park your cash than bonds. That’s set to change.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
Cash has ‘zero risk’ of losing nominal value
The majority of financial advisers I spoke to didn’t suggest any knee-jerk actions ahead of the Fed meeting. In other words, don’t close your bank accounts.
“Inflation has certainly moderated, but in our opinion is not likely to be a further decline substantially,” said Peter J. Klein, chief investment officer and founder of ALINE Wealth.
If that’s the case, the Fed will not keep lowering interest rates but will hold them steady moving forward.
“Looking at the long arc of inflation history, one can see the changes … leading to sticky and persistent inflationary pressures. So, the notion that rates will come down substantially — and stay down — is not our base case,” Klein said.
That means that those savings you have in a federally insured, accessible bank account earning above the rate of inflation remain a good bet. That’s especially the case for those nearing or in near retirement who plan to tap that money for living expenses and don’t want the worry that comes from price fluctuations in stocks and bonds.
“Cash is the only asset that an investor can deploy in a portfolio that has zero risk of losing its nominal value,” Klein added.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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