- The Federal Reserve announced on Wednesday that it would cut interest rates for the second time in as many months.
- The cut brings the range for the benchmark interest rate to between 1.75% and 2%, the lowest level since before the Great Recession.
- Americans will likely see the annual percentage yield (APY) on their savings accounts decrease, but there’s no reason to pull back on saving money.
- As long as your money is in a high-yield savings account, you’re likely still beating inflation.
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The Federal Reserve announced on Wednesday that it would cut interest rates again, less than two months after cutting rates for the first time in a decade.
In an effort to sustain the US economy’s longest expansion on record, the Federal Reserve is cutting rates by another quarter-percentage-point, bringing the target range for the federal funds rate to between 1.75% and 2%.
This is generally good news for consumers, as it makes borrowing money from banks, whether it be a credit card or a home loan, cheaper. The theory is that when it’s cheaper to borrow money, Americans are encouraged to spend more, which spurs economic growth and, in an ideal world, sidesteps a recession. But when the cost of borrowing drops, so too do the rates banks pay us to hold our money.
With the economy on a tear, banks and even financial startups have been engaging in an all-out battle for savers, touting interest rates well over 2% on their high-yield savings accounts over the last year, thanks to years of interest-rate hikes by the central bank. That means an account earning 2% with a $US5,000 balance would net a saver $US100 in interest in 12 months. When the account charges no fees and the money is easily accessible, there’s incentive to shore up even more money.
But when the central bank cuts the interest rate range, consumer banks follow suit and lower their savings-accounts rates. The latest cut means the earning potential on your savings account will likely decrease, but there’s no reason to panic.
What exactly does an interest rate cut mean for savers?
In short, the annual percentage yield (APY) on your savings accounts will go down, if it hasn’t already. If you have money in a certificate of deposit (CD) the rate will remain the same since it’s locked in until the maturity date. Rates on new CDs will go down, too.
But lower interest rates doesn’t mean you should stop saving money, or put off starting.
Some online banks including Ally and Marcus by Goldman Sachs already lowered the rates on their popular high-yield savings accounts earlier this summer in anticipation of the Fed’s first rate cut in July, though only by 10 basis points, Greg McBride, Bankrate.com’s chief financial analyst, told Business Insider. It’s still a great time to be putting money in a high-yield account, he said.
“The impact we see on online savings accounts will be that instead of an across-the-board quarter-point cut by all the top-yield accounts, there will be an incentive to hold the line and not cut rates, and those who do cut rates will be inclined to do so by less than a quarter point,” McBride said in response to the July rate cut. The Fed has issued nine rate increases over the last few years, so the cut will only undo some of those hikes, he added.
Financial experts recommend the average American maintain an emergency fund with at least three to six months worth of expenses and keep it in a liquid account, such as a high-yield savings or money-market account. Even when the Fed’s benchmark rate fluctuates, these accounts tend to earn up to 20 times more than a traditional savings account, and 200 times more than your typical checking account.
But while most brick-and-mortar and online bank’s high-yield accounts topped out at around 2.5% APY ahead of the Fed’s July 31 announcement, online investing advisers Betterment and Wealthfront offer accounts earning 2.44% APY and 2.32% APY, respectively. These robo-advisers may also adjust their interest rates in accordance with the central bank, but with such a high beginning APY, they could still remain market leaders.
Across the board, high-yield savings accounts offer better rates than a traditional savings account, so you’ve already made progress toward automatically building wealth by keeping your money there, regardless of how the rate continues to shift over time.
“The important thing is you’re still earning more than the rate of inflation,” McBride said, “and you’re light-years ahead of everybody who is saving in an account earning 0.01%.”
savings and retirement