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Savers have been enjoying the benefits of higher interest rates, like attractive rates on high-yield savings accounts and certificates of deposit (CDs) — but those perks won’t last forever. While the Federal Reserve kept rates where they were during its meeting in May, many financial experts say to expect rate cuts later this year.
Should you adjust your savings portfolio before rates come down? Here are three moves to consider.
The Current State of Interest Rates
As high inflation hit the economy in recent years, the Federal Reserve increased interest rates in an effort to fight those spiraling consumer prices. The Fed has raised its benchmark federal funds rate 11 times since early 2022, and banks and credit unions in turn upped rates on their savings products. But while the Fed kept rates steady during its meeting in May, many financial experts say to expect rate cuts later this year.
The Federal Reserve suggested in March that three cuts to its benchmark lending rate may be coming in 2024. Consumers should expect that financial institutions may follow suit.
What to Do Before Interest Rates Cuts
1. Open a High-Yield Savings Account
A high-yield savings account can be a great place to park cash for emergencies or short-term goals — and they’ve recently become an even more attractive place to save.
While the national average savings account interest rate is 0.45%, some of the best high-yield savings accounts are offering as high as 5.5% annual percentage yield (APY). Banks typically follow the Fed when it comes to setting interest rates, which means that the day of easily earning 5% on your cash in these accounts may be coming to an end. But it’s not too late to benefit, especially since these accounts typically offer higher rates than traditional savings accounts even in lower-rate environments (the difference may just not be as large).
High-yield savings accounts are federally insured up to $250,000 per account per depositor.
2. Lock in CD Rates
Rates are also competitive right now for certificates of deposit (CDs). Going into May, many CDs are offering more than 5% APY.
CDs are fixed-rate investment vehicles, meaning if you open one today, the interest rate you lock in will be around until the end of your CD’s term. Your money won’t be impacted by rate cuts.
However, CDs come with specific term lengths and require you to keep your money locked up for that amount of time, typically three months to five years. If you withdraw your funds early, you’ll face fees (the no-penalty CD is an exception).
3. Buy Treasury Bills
Treasury bills, also known as T-bills, are another option to consider. They don’t come with FDIC insurance protection, but T-bills are backed by the federal government, making them a popular choice for those who want to invest more than $250,000 while still benefiting from government protection.
Rates are also around 5%, significantly exceeding the traditional savings rate. They can be purchased through TreasuryDirect.gov or a third-party provider like a bank, online brokerage or dealer.
The Bottom Line
While there’s no way for us to know exactly when the Fed will cut rates, you can still benefit from the high interest rates we’ve seen since early 2022. Put your money to work by opening a high-yield savings account, locking in CD rates and buying Treasury bills.
Sources
Board of Governors of the Federal Reserve System. Accessed May 23, 2024. https://www.federalreserve.gov/monetarypolicy/fomcminutes20240501.htm.
Federal Reserve Press Release. Accessed April 30, 2024. https://www.federalreserve.gov/monetarypolicy/files/monetary20240320a1.pdf.
Federal Reserve Bank of New York. Accessed May 23, 2024. https://www.newyorkfed.org/markets/reference-rates/effr.
Board of Governors of the Federal Reserve System. Accessed May 23, 2024. https://www.federalreserve.gov/default.htm.
U.S. Securities and Exchange Commission Office of Investor Education and Advocacy. Accessed May 23, 2024. https://www.sec.gov/files/reits.pdf.
Treasury Direct. Accessed May 23, 2024. https://www.treasurydirect.gov/marketable-securities/treasury-bills/
Internal Revenue Service. Accessed May 23, 2024. https://www.irs.gov/instructions/i1120rei.
