The Federal Reserve announced Wednesday that its Open Market Committee had voted to cut the federal funds rate by 25 basis points to a range of 1.75% to 2%.
The federal funds rate is the benchmark interest rate that banks use when lending to one another. Interest rates on loans and deposits are typically influenced by the Federal Reserve’s decisions vis-à-vis the federal funds rate.
“Banks have to lower the deposit rates now in response to the Fed rate cut,” said Dan Geller, founder of consulting firm Analyticom. Here’s what not to do now that the Fed has cut rates:
Don’t ignore certificates of deposit
Rates on certificates of deposit have been falling for months now — the first time that has happened across the board in five years.
As a result, people will earn less substantial returns when they take out a CD these days than they would have at the start of 2019. But that doesn’t mean they should shift away from this savings tool.
In fact, CDs may be a better bet, Geller said. “If you can get a good high-yield now and you’re guaranteed to receive this rate for the next three to five years, you’re going to ride the next recession with a relatively high rate,” he said.
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Many people make the mistake of moving their cash into liquid accounts, such as high-yield money-market and savings accounts, particularly as the threat of a recession looms, Geller said.
The yield on those accounts isn’t guaranteed like it is with a CD. He estimates that Americans lost billions of dollars in interest by giving into this money anxiety during the last recession.
“Resist the temptation to think that if you put it in a money-market account that it’s more accessible to you in a time of need,” Geller said. “Even if you have to pay a small penalty at some point to break the CD, it’s worth it.”
Geller’s simple rule of thumb for approaching CDs today: Find the highest rate for the longest term.
Don’t just leave your money in a bank account and forget about it
A recent survey from Bankrate found that nearly 70% of Americans had savings accounts that paid less than 2% interest. At a time when interest rates are falling, that can be an especially costly mistake.
“Do not let your money sit fallow in a bank paying an uncompetitive return,” said Greg McBride, chief financial analyst at Bankrate. He added, “Be prepared to move their money to a bank paying a better return.”
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Many online banks offer upwards of 2% interest on their savings accounts — even in the current climate. Those banks will continue to compete on interest despite rates falling overall in order to score more customers.
Don’t make major adjustments to your long-term savings plan
The Fed’s interest-rate decision initially sent stocks falling — both the Dow Jones Industrial Average DJIA, +0.13% and S&P 500 SPX, +0.03% both dropped in afternoon trading before recovering — largely because the central bank did not clarify whether it will cut rates yet again later this year.
Markets have been volatile in recent months, thanks to monetary policy, an increasingly volatile stock market and President Trump’s ongoing trade dispute with China.
As such, this isn’t the time to pull money out of the market or make significant changes to your retirement planning. Instead, experts suggest seeking out healthy distractions like hanging out with friends or hitting up the gym.