The Federal Reserve announced Wednesday it would cut federal interest rates by 25 basis points, or a quarter of a point, confirming what economists had already predicted was inevitable. While a cut usually signals impending financial doom, today’s was different.
“The rate cut, overall, is being described as a ‘cushion’ to help continue the momentum of the currently prosperous economy, with some saying it will help offset some of the pressures from the trade war,” Forbes personal finance writer Kelly Anne Smith told Reviews.com.
While the cut may fit with a broader macroeconomic strategy to bolster the economy, it comes with implications for individuals on a personal level. If you have money in a bank, you’ll likely feel some sort of effect, though the extent of those effects will vary depending on the accounts you hold. High-yield savings accounts, like those offered by online banks, will likely fare better than lower-yield accounts. Though some online banks, such as Ally and Marcus, preemptively cut APY rates before Wednesday’s announcement, the interest rates they offer are still competitive.
“While these accounts were affected, it’s important to keep the big picture in mind: They still have much higher percentage rates than traditional savings accounts,” Smith said.
A spokesperson from Ally added that “It’s helpful to keep a rate decrease in perspective. A 10 basis points decrease in APY translates to a difference of just one dollar less earned in interest over the course of a year for every $1,000 in savings.”
The math behind this checks out: Cutting .01% from the 2.1% APY on an Ally savings account is less detrimental than the same cut on a traditional savings account (for example, Chase’s savings account APYs start at .01%).
“Rates on most of these nontraditional online savings accounts are already outpacing inflation, meaning you’re getting a substantially healthy rate of return, even with one or two of these modest Fed rate cuts,” said Sarah Foster, Bankrate’s Federal Reserve and economy reporter.
Cutting federal interest rates shows “officials are clearly worried enough about the risks clouding the picture … they’re trying to prop up the economy before the downturn starts,” Foster said, adding that “consumers can take solace in the fact that Fed officials are being vigilant.” Today’s announcement should remind consumers it’s still a good time to start “building up your funds in a high-yield savings account” in case of economic challenges down the road.
Matt Goldberg, a consumer banking reporter at Bankrate, agrees. “Rates have come a long way in helping to lift high-yield savings accounts and it should still be a great time to be a saver, regardless of one rate cut.”
When Reviews.com evaluated the best savings accounts for 2019, we also found online banks to be more favorable than traditional ones on a number of metrics. A spokesperson for Ally explained that they can offer better rates than traditional banks “because overhead costs are lower with a digital banking experience than they would be with physical branches.”
Though competitive rates are a big draw for nontraditional savings accounts, there are other things to consider. Smith says “a consumer should do their due diligence in research before choosing a high-yield savings account – they are incredibly popular right now and there’s a growing market for who offers them. Shop around for an account and make sure it suits your needs, instead of just choosing one with the highest interest rate.”
If you’re worried about subsequent rate cuts, now could be a good time to lock in a certificate of deposit (CDs), said Foster. “Another option is laddering those CDs, which means buying multiple CDs that mature at different intervals. That sort of acts as insulation from interest rate fluctuations.”
Another way to use the rate cut to your advantage is to get serious about your debt. The average credit card APR is sitting at an all time high of 17.8%, according to creditcards.com. “If a rate cut can help lower this, even by a small amount, consumers can save money in interest fees as they continue to hack away at their debt,” Smith said.
It’s a good idea to consider current market conditions, but doing your diligence is a common theme in personal finance. Here are some resources to help you make the right choice for your money: