Ben Bernanke, Chairman of the Federal Reserve, announces another interest rate cut . . . Wall Street rallies and Americans cheer. But how does a cut in interest rates really affect Americans anyway?
For savers, who like guaranteed returns from high-yield savings accounts, money markets and CDs, the Federal interest rate cut is not particularly good news. When the Federal Reserve “cuts rates,” they are lowering the short-term interest rate for borrowing money from the Federal Reserve. This directly impacts the interest rates paid by borrowers and businesses.
Banks often look to borrowing your cash as a way to bring in funds, particularly in this rocky credit environment. When your money is most attractive, they can typically pay you an attractive 5% or more on your money via a CD, money market fund or high-yield savings agreement. But when the Federal Reserve drops rates, it makes the Fed’s money and low interest rate an attractive alternative. As a result, the interest they are willing to pay you decreases as their borrowing options increase.
Banks will not be too quick to cut rates before their competitors, but in time you will likely see a lower yield offered on your savings. Particularly if there are more federal rate cuts on the horizon.
So, where do you go now to get those great, guaranteed returns? If you are locked in to a CD, you have nothing to worry about. The interest rate you are receiving on your CD will not change until your investment matures and you re-negotiate the terms on the CD. Money market funds and savings rates, however, can virtually change at the bank’s discretion.
Generally, when the Federal Reserve cuts rates, the stock market rallies as a result of:
- People taking money out of savings to seek better returns in stocks
- Businesses paying lower interest rates on loans, which improves their profits
- Businesses can now stretch their dollar and benefit from increased purchasing power
However, with constant news about the weak dollar, credit crisises at banks, sub-prime mortgage problems, soaring oil prices, a poor housing market, record foreclosure rates and a gloomy or unpredictable economic forecast, the stock market may not exactly been the best place for a short-term investor to put his/her money.
Typically, when the federal interest rate goes down, the dollar weakens and causes inflation. This, in turn, generally sends the price of gold soaring, but even gold might not be a safe play right now. With the already, pre-existing weak dollar, gold has reached new highs. Buying gold at it’s 28 year high does not make it an attractive entry point.
So, where does that leave you? If you act fast, you can still lock in pretty attractive rates on CDs before banks adjust their yields. Go to www.bankrate.com to search and compare your best options.
Loading ...