With Federal Reserve Chair Jerome Powell signaling that “the time has come” for rate cuts, now is the moment to consider how these changes might impact your financial decisions. The anticipated rate reductions could offer both opportunities and challenges for borrowers, savers, and spenders.
Last week, Powell suggested that rate cuts could begin as early as the Fed’s next meeting, sparking speculation that more reductions might follow over the coming year. Currently, the federal funds rate sits between 5.25% and 5.5%.
The Fed’s aggressive rate hikes since March 2022 were designed to combat rising inflation, but they have also increased borrowing costs for households dealing with higher prices, leading to more expensive mortgages, credit cards, and car loans. On the flip side, savers have benefited from higher returns on savings accounts and CDs.
As rates are expected to decrease, borrowing could become more affordable, offering relief to some households. However, those with cash in high-interest accounts might see their returns diminish. “It’s all about optimizing,” says Mark Hamrick, senior economic analyst at Bankrate.
To help you optimize your financial situation, here are three key strategies and one quick move to make the most of your money as rates change.
1. Quick Move: Lock in a CD at Today’s Rates
A Certificate of Deposit (CD) allows you to secure a fixed interest rate for a set period, protecting your savings from the immediate impact of rate cuts. While high-yield savings accounts will see rates drop soon after cuts, a CD can help you continue earning interest at today’s higher rates for a bit longer.
Shorter-term CDs (ranging from 30 days to a year) generally offer lower returns compared to longer-term options. However, with uncertainty about the future, many banks are offering competitive rates on one-year CDs—around 5% or higher—comparable to longer-term rates. For those planning significant purchases in the near future, a CD matching the timeline of that goal can be a wise choice, advises Jaime Eckels, a wealth-management partner at Plante Moran Financial Advisors.
2. If You’re Trying to Save: Prioritize Liquidity
Without a specific spending goal in mind, a high-yield savings account remains the best option. It offers easy access to your funds when you need them, unlike a CD, which may impose penalties for early withdrawal—penalties that are usually higher for longer-term CDs.
Hamrick emphasizes that liquidity is crucial, especially in preparing for unexpected expenses. This way, you can avoid resorting to costlier debt options like credit cards or personal loans.
3. If You Have Credit Card Debt: Negotiate and Consider a Balance Transfer
Even after the Fed begins cutting rates, credit card interest rates are unlikely to drop significantly. With the average U.S. credit card rate at 24.92%, it’s essential to stay on top of your debt repayment strategy.
Bobbi Rebell, CEO of Financial Wellness Strategies, suggests calling your credit card company to negotiate a lower interest rate. Another option could be transferring your balance to a card offering a 0% introductory rate, as Eckels recommends.
4. If You’re Waiting to Make a Big Purchase: Timing the Market Might Not Pay Off
For large purchases like a house or a significant appliance, trying to time the market based on interest rates could be futile. While it may seem like waiting for lower rates is a good idea, other factors, such as demand and housing prices, also play a role.
Interest rates aren’t the only driver of home affordability. Even though mortgage rates often follow the federal funds rate, they’ve recently declined somewhat. But when rates drop, buyer demand may increase, potentially driving home prices up.
Eckels reminds us that homeowners can always refinance their mortgage later if rates fall further.
The Bottom Line: Don’t let the prospect of rate cuts dominate your financial decision-making. “Stay informed about the macroeconomy, but don’t let it paralyze your life decisions,” Rebell advises.
