Interest Rates Are Dropping: Here Are 3 Ways Experts Say You Can Still Access High Returns on Your Idle Cash
If you have any of your money invested in U.S. Savings bonds, you may have heard that government interest rates are going to be cut this year. This means that the recent high returns on U.S. treasuries and savings accounts may no longer be available soon.
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Here’s what you can do to make the most of higher rates while they are still available.
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How Do Rate Cuts Affect Your Savings?
In a recent announcement after the September 17-18 Federal Open Markets Committee meeting, Federal Reserve Chair Jerome Powell revealed that the Fed had decided to lower its interest rate by 0.5%. Later, during a conference in Nashville, Tennessee, Powell indicated that the Fed is likely to do two more 0.25% cuts in 2024 “if the economy performs as expected.” This may mean even more rate cuts if the economy underperforms since cutting rates is one of the ways the Fed can stimulate the economy.
Federal interest rates were raised gradually from 0.25% to 5.5% in 2022 and 2023 as a way to combat inflation. Since banks borrow their money from the Fed, interest rates for other types of loans and financial products are based on the Fed’s rate. This meant higher interest rates on credit cards, mortgages and auto loans, but also higher returns on certain investments, such as U.S. government bonds and high-yield savings accounts.
If you have your money in any of these investments, then rate cuts mean that the returns you get on your money will be smaller and smaller with each cut. Here’s what you can do to maximize your returns for as long as possible.
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Lock In Current Rates With a Certificate of Deposit
If you’re not going to need to access the money you want to save for a while, then you can invest in a certificate of deposit account while rates are still relatively high. A CD is a type of savings account provided by your bank. Rates on CDs are generally higher than a regular savings account, but the trade-off is that you can’t withdraw your money during the CD’s term without a withdrawal penalty.
However, if you don’t need to tap into this money, a CD term can work in your favor. This is because the interest rate for a CD is a fixed rate, unlike the variable rate on a regular or high-yield savings account. If you lock your money into a CD for the next year, you will get the current interest rate during that whole period, even if the federal rate is cut.
Invest Your Money in Longer-Term Bonds
Since 2022, there’s been an inverted yield curve on Treasury bonds. What this means in simple terms is that short-term bonds give investors higher returns than longer-term bonds. This usually happens when the market expects a recession.
However, the recent news of rate cuts and expectations of further cuts in the future have resulted in a reversal for longer-term bonds. While short-term bonds still have higher returns than long-term bonds, 10-year bonds now offer higher returns than two-year bonds. What this means is that long-term government bonds may be a good investment for those who want to lock in relatively high returns over a longer period, such as 10 years.
Short-term 3-to-12-month bonds still currently offer higher yields than a 10-year Treasury bond, but once the Federal Reserve cuts rates further, those short-term returns will no longer be available, and you may not be able to get the same rates on long-term bonds. If you want to put money into a safe asset for retirement and won’t need to touch the money until then, a 10-year Treasury Bond could be a good safe investment for part of your portfolio.
Take Advantage of High-Yield Savings Accounts While You Still Can
If you want to put your money somewhere where it will earn you decent safe returns for now but will still be easily accessible in case of an emergency, then you can put it in a high-yield savings account. However, since savings account rates are usually variable, once the Fed cuts rates further, the returns you will get on your money will get smaller and smaller with each cut.
You should also be aware of any minimum deposit requirements or withdrawal fees. High-yield savings accounts usually have stricter rules than a regular savings account, so make sure to review all the terms carefully.
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This article originally appeared on GOBankingRates.com: Interest Rates Are Dropping: Here Are 3 Ways Experts Say You Can Still Access High Returns on Your Idle Cash