The Federal Reserve lowered its key overnight lending rate further on Thursday, after a half point reduction in mid-September. Analysts who focus on the Fed also believe that the central bank may reduce the rate once more this year, by a quarter point, in December.
If so, that would mean the fed funds rate that affects directly or indirectly, the rates on a wide array of consumer savings and lending products across the economy, would have fallen by one full percentage point by year-end. But that does not mean that as a result interest rates are now low — or will soon be low. ‘
Falling interest rates’ and ‘low interest rates’ are two different things. Interest rates are high and will only come down to ‘not as high as’ … we will see in early 2025,” said Greg McBride, the CFA and the head of Bankrate’s financial division.
Here is a look at how far rates have come down on your savings, loans and investments, and what the experts are predicting in the future. Assessing your debts The rate environment is still not much better for those with debt on their balance sheet.
Credit cards: In the period just prior to the Fed lowering its key rate in September, the average credit card rate was 20.78%, Bankrate reported. By this week, it has only dropped to 20.39%, just below half a percentage point.
That is still above the 16.3% average rate observed at the beginning of the year 2022 when the Fed began to raise interest rates to tame inflation.
Therefore even if the Fed reduces rates gradually over the next two years, credit card debt will remain the most expensive debt you can have. And that is why you will always get the same advice regardless of the overall rate situation. Get rid of your credit cards as soon as possible.
If you qualify, try to find a balance-transfer card that will offer you up to 21 months at 0% interest and pay as much of your principal down during that period as possible.
“Getting a 0% balance transfer credit card or a low interest personal loan to reduce your rates and pay off your debt can make a much bigger difference than anything the fed will ever do,” said Matt Schulz, chief credit analyst at LendingTree.
Another option: Consider moving your balance to a credit card provided by a credit union or a local bank. While they may not provide as many benefits, they usually have lower prices, according to Chris Diodato, a certified financial planner.
Mortgages: In fact, after the Fed began lowering rates, mortgage rates have increased across the board. That’s because they are related to changes in the 10-year Treasury yield, which tends to respond to economics indicators such as inflation and growth, and analysts’ expectations of the Fed’s actions.
Because recent data has arrived higher, the 10-year has extended its increase since mid-September. As a result, the average rate on a 30-year mortgage reached 6.79 % as of November 7, which exceeded 6.2 % a week before the Federal Open Market Committee meeting in September.
Still, it remains far from the levels it was at a year ago when the average touched 7.50%, based on data from Freddie Mac. After the US presidential election, Sam Khater, the chief economist of Freddie Mac, pointed out that there is some risk in the short term that the mortgage rate may increase because policy risk is now high.
Ways Of Making Money On Savings Without Much Risk
The reason consumer Interest rates are not down a lot — and in some cases, not at all — is helping savers. “Yield on interest earnings on savings accounts, money markets and certificates of deposit will decline, but the most competitive yields are still significantly ahead of inflation,” McBride said. Savings accounts: Conventional savings accounts remain almost as ungenerous as before, yielding less than 1%.
The highest return on cash savings is in Internet high-yield savings accounts at FDIC-insured institutions. Prior to the Fed’s September rate cut many of those accounts were paying between 4.25% and 5.3% as per the list of accounts available on Bankrate.com.
On Thursday the yields on offer had come down by a quarter point or so and were between 4 percent and a little more than 5 percent, which was way above the latest inflation rate of 2.1 percent.
Certificates of deposit: FDIC insured CDs are also still yielding inflation busting returns. Prior to the last Fed meeting, CDs posted on Schwab.com with terms of 3 months to 10 years were yielding between 3.65% and 4.99% annually. Thursday range was 4.25% to 4.60%.
Bonds: If you are a resident of a high tax state, you may want to invest some of your money in Treasury bonds, which are free from state and local taxes; or in high grade municipal bonds, which are generally free from federal income taxes, and sometimes state and local taxes also.
The short-term T-bills with a maturity of three months to one year were at 4.32% to 4.54% on Thursday at Schwab.com. And Treasury notes (with tenors of two to 10 years) were offering between 4.19 percent to 4.35 percent.
That is much higher than the levels they were at mid-September when the two- and 10-year notes were at 3.6 percent and 3.64 percent respectively.
Muni rates, on the other hand, have remained relatively robust, and in fact have even risen in the face of Fed rate cuts because more of them have been issued in the run-up to the US election, according to Sinead Colton Grant, the Chief Investment Officer at BNY Wealth.
As per market anticipations that the Fed will possibly persist with rate cuts next year, Colton Grant said, “We prefer bonds especially as cash yields are going to decline further.”
But she does expect fluctuation in bonds, which is why she recommends active management for the fixed income of your portfolio over the next year, either in a separately managed account within your 401(k) or in an actively managed bond fund.
Do Not Put A Lot Of Money In Low-risk Investments
It is satisfying and simple to make money on your cash in almost no-risk ways when rates are high. However, as they start coming down in the next year, you lose so much other advantages that go with it.
Diodato now advices his clients against what he terms as ‘the cash trap’, and keeping too much money in savings and money markets because it is actually detrimental to your net worth over the long run since stocks and bonds in general have outperformed yields on cash.
That’s why, if you are not in or close to retirement age, he would not advise having more than $6 months to a year’s worth of living expenses in cash or cash equivalents. And Colton Grant insists that it is safe to remain broadly diversified because equities will remain primarily dependent on earnings and interest rates, come who may emerge as the winner of the US presidential election.
For instance, she said, BNY has been overweight in US large cap stocks because of their solid free cash flow and productivity from AI. “If you look at equity markets over time and how they have fared under different administration, they have fared well under all conditions,” she said.
