After a couple of years of hiking interest rates, the Federal Reserve finally has begun to lower its target federal funds rate for the first time since 2020.
In September, the Fed announced a cut of 0.5% in the rate. The Fed will meet again in both November and December, and the expectation is that rates will fall again by 0.25% at both meetings.
What do these rate cuts mean for your wallet? We discussed some of the possible impacts of lower rates in our story “7 Things That Get Cheaper When the Fed Cuts Rates.”
There might also be a few things you can do to improve your finances as lower rates arrive. Here are some smart money moves to consider.
1. Lock in a great CD rate
It seems like only yesterday that certificate of deposit (CD) rates were pitifully low and finding a 5% return was a fairy tale. But today, you can easily get 4% or even 5% on a CD.
The good times might not last, however. Now that the Fed is lowering the federal funds rate, CD rates should begin to fall. This probably won’t happen overnight, but it is likely over time.
So, you might consider locking into a great CD rate now. If you lock into a long-term CD today, you will continue to earn the current rate for the duration of the CD term, no matter how much rates fall in coming months and years.
2. Consider moving money out of money market funds
Rates on money market funds also have risen sharply as the Fed has pushed the federal funds rate higher. Unfortunately, those rates are now likely to fall as the Fed turns to its “easing” mode.
People generally look to money market funds as a place to park cash they expect to tap in the relatively near future. If you do not plan to spend such money for a year or more, however, it might make sense to consider moving the cash into a nine-month, one-year or 18-month CD, if you can lock into a good rate.
3. Consider putting money in longer-term bonds
Longer-term bonds also might become more attractive in a climate of falling rates.
As interest rates fall, the price on these longer-term bonds should begin to rise, which in turn should be good for those who hold the bonds.
However, take special note of the word “should.” Life has a funny way of surprising all of us, and things might not work out as you planned.
Just because a strategy has worked well in the past doesn’t mean it will in the future. Neither this nor any of the other strategies on this list should be construed as financial advice.
If you are unsure of which approach is right for you, consult with a financial advisor to get some professional guidance.
4. Start saving (or save more) for a down payment
There is no one-to-one relationship between the federal funds rate and mortgage rates. However, Federal Reserve policy — including whether the Fed decides to hike or cut the federal funds rate — typically does influence where mortgage rates go.
To simplify a bit, if the federal funds rate is drifting lower, mortgage rates can be expected to drift in the same direction.
While mortgage rates are not guaranteed to fall, odds are good that they will if the Fed keeps cutting the federal funds rate. Lower home loan costs would be a boon to those who want to buy a home but find that today’s mortgage rates are too high to make a purchase feasible.
So, if you are interested in buying a home and are waiting for mortgage rates to fall, now is the time to double your efforts to save up enough for a down payment so you will be ready to strike when the opportunity arrives.
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