With inflation steadily headed toward the 2% target, the Fed announced at its November 7th meeting that it would cut interest rates by 0.25 basis points, after dropping the rate by 0.50% on September 18th.
Here’s how the federal rates have changed since 2022:
5 money moves you should make before further rate drops
The Fed rate influences the rates that banks set on consumer products, such as high-yield savings accounts, certificates of deposit (CDs), and credit cards.
“A higher federal funds rate means banks’ borrowing costs are greater,” says Dan Tolomay, chief investment officer (CIO) of Trust Company of the South. “This gets passed on to consumers in the form of higher interest rates on things like auto loans and mortgages.”
Conversely, a lower Fed rate means lowering borrowing costs for banks and, therefore, lower borrowing costs and higher savings rates for consumers.
If you’re wondering how you should navigate your finances in the face of this second drop, consider these four strategies:
1. Pay down your high-interest debt
High-interest debt, such as credit card debt, can prevent you from reaching your financial goals. Even with a few small cuts, interest rates remain relatively high, and the cost of holding credit card debt continues to be expensive. In May, the average annual percentage rate (APR) was 22.76% for all credit card accounts with assessed interest.
Make a plan to reduce or eliminate your debt. With the avalanche method, borrowers attack high-interest debt first to save money on interest. If, however, you prefer small wins to keep the momentum going until you’ve paid off all your debt, try the snowball method. The best strategy for you will depend on what you can stick to in the long term.
2. Put some money away in CDs
CDs utilize fixed APYs, meaning your rates won’t change once you get them set up. Taking advantage of the long run of high interest rates, some five-year CDs have APYs around 4%, and several one-year CDs currently have APYs close to 5%. We’ve seen these rates start to fall, and they will likely come down further as the Fed rate continues to drop.
It’s worth shopping around for a CD rate that takes advantage of the current interest rates before they drop further and potentially even setting up a CD ladder to make the best of the rates at hand.
3. Shop for a new savings account
Higher interest rates aren’t always bad news, especially for savers. The APY on your savings account will likely go up and down alongside the federal funds rate. If you’re shopping for a new account to park your savings in, a higher APY can help your balance grow even faster.
The most recent rates from the Federal Deposit Insurance Corp. (FDIC) put the national savings APY average at 0.43%, although banks set their own rates, and you can likely secure a much higher APY by shopping around and utilizing a high-yield savings account.
4. Avoid making any sudden investing moves
Any time rates change or the market anticipates these changes, you could see positive and negative stock market swings. Higher interest rates tend to affect earnings negatively and lower stock prices while lower rates can encourage business growth and raise prices. You might be tempted to hop on an investing trend or panic sell as a result.
If you’re investing for a goal that is still years down the line, you may want to ride out any short-term market changes. Timing the market is a risky move, and sudden changes could work against you.
5. Work on boosting your credit score
Lenders rely heavily on your credit score and the information in your credit report to determine whether or not to give you financing for big purchases like a home or car. It’s important to scope out different rates and improve your credit score, as doing so could mean more favorable terms.
“If consumers are waiting for lower interest rates to refinance, when interest rates finally do start to come down the best way that they’re going to be able to take advantage of those is if they have good credit and good credit scores,” says Raneri.
Some of the key ways to improve your score include:
- Make timely payments: Pay your bills on time and in full.
- Keep your credit utilization ratio under 30%: Your credit utilization ratio is the ratio of credit you’re using to the total amount you’ve been extended.
- Limit the number of new credit applications: Too many new applications in a short amount of time can hurt your score.
- Review your credit report for errors: Inaccurate information can drag down your score significantly. Catching an error early on and disputing it with the credit bureaus immediately can ensure that it’s dealt with and removed from your report.
The takeaway
As the federal funds rate continues to decline, rates on everything from credit card APRs to mortgages will follow. While this is good news for those carrying credit card debt or planning to buy a home, it could mean bad news for savers stashing cash in bank accounts.
Regardless of what the Fed does, focus on what you can control when it comes to your finances—shop around for the best rates on savings accounts, improve your credit score, and stick with a long-term investment plan.
