Fed Slashes Rate Over Coronavirus ‘Risks’: What It Means for You

Abraham Lincoln wearing a face mask on the $5 bill during the coronavirus pandemic
Photo by Ascannio / Shutterstock.com

In an unscheduled move attributed to the economic impacts of the coronavirus COVID-19, the Federal Reserve slashed its benchmark federal funds rate by 50 basis points today, putting it in a range of 1% to 1.25%.

In its statement, the Fed said:

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”

Today’s rate cut was not entirely unexpected — Money Talks News founder Stacy Johnson is among the experts who recently warned of imminent Fed action. Still, the rate cut marks the first time since October 2008 that the nation’s central bank has taken emergency action.

It also marks the first time since the Great Recession that the Fed has lowered the federal funds rate by more than 25 basis points at one time.

Are more rate cuts ahead?

No one can predict what will happen next with this coronavirus or the economy, so not even the Fed knows the chances of another rate cut in the near future. At the same time, the Fed hasn’t exactly ruled out another cut, so it’s fair to say another cut is possible.

The central bank even said in its statement today that it’s “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

USA Today reports that in a note to clients, Paul Ashworth, chief U.S. economist at Capital Economics, wrote that this could indicate that the Fed may be “leaning toward an additional rate cut” at its meeting on March 17-18.

What should you do now?

When the Federal Reserve cuts the federal funds rate, the interest rates that banks pay tend to follow. And when interest rates are falling or expected to fall further, consumers generally would be wise to lock in an interest rate ASAP.

Putting some of your cash savings in a certificate of deposit (CD) allows you to do just that: Lock in a specified interest rate for a specified length of time.

Now, it would have been better to put money in a CD before today’s Fed rate cut — like when Stacy advised it last week — because banks may have already started lowering their own interest rates in response to today’s Fed rate cut. But if you didn’t act then, acting now is still better than waiting for another rate cut — although, of course, another rate cut is not a sure thing.

Start by finding out what interest rates multiple banks are offering on CDs right now. Using a free online resource like Money Talks News’ CD search tool enables you to view multiple rates from multiple banks in one place.

Then, decide for how long you are comfortable locking up your cash savings. CDs tend to pay higher interest rates than savings accounts, but it’s in exchange for you agreeing not to touch the money that you put in a CD for the length of the CD term. Remove money from a CD before then, and you stand to get hit with a penalty.

Other options?

CDs are not the only way to earn a higher return on cash savings in the short term, but they are among few risk-free ways to fight inflation in the short term.

That’s because money in a CD is insured. The Federal Deposit Insurance Corp., an independent federal agency, insures such deposits for at least $250,000. (To verify whether a bank is FDIC-insured, use the agency’s BankFind tool.)

If you’re uncomfortable locking up any savings in a CD right now, at least make sure your money is with a competitive bank.

Even the most competitive banks are likely to lower their interest rates in light of today’s Fed action and possible future Fed action, but competitive banks still tend to pay significantly higher rates than noncompetitive banks.

For example, the current national average among savings accounts was a paltry 0.09% as of Monday. But at least as of this afternoon, you could get a savings account that pays as much as 1.75% at an online bank like CIT Bank.

What’s your take on this news? Sound off below or on the Money Talks News Facebook page.

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