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For the first time in a long while, interest rates will start falling soon.
On Sept. 18, the Federal Reserve Board cut its target range for the federal funds rate by half a percentage point (50 basis points). It’s the first rate cut since March 2020, when the economy came to a screeching halt amid COVID-19 lockdowns.
When interest rates begin to fall, it can have profound effects on your wallet. Rates on savings accounts and certificates of deposit (CDs) start to drift lower. And they may decline even further if the Fed keeps lowering the federal funds rate, as many expect.
So, where should you put your money when the federal funds rate is trending down, making options like savings accounts less lucrative? Following are a few options. Just keep in mind that your goals, your ability to stomach investment risk and the length of time for which you can allow your savings to sit untouched will determine which strategy is best for you. If you are unsure, consult with a financial advisor.
Longer-term CDs
If you think interest rates are about to begin an extended period of falling, you might benefit from locking into a longer-term CD at today’s still relatively high rates.
If you put your money into a five-year CD, for example, you will have the peace of mind of knowing your interest rate won’t fall during that time — and your money is insured.
Of course, if rates reverse direction and begin to climb again, you might regret having locked into the longer term. If you try to get out of the CD early, you may pay a penalty for the privilege of doing so. Many CDs have early-withdrawal penalties, though there are penalty-free CDs out there.
Series I bonds and TIPS
If you simply want to keep pace with inflation, you can do so by purchasing Series I government savings bonds and Treasury inflation-protected securities, or “TIPS.” Both of these options have a built-in inflation-protection component.
They’re also good for people with a low risk tolerance, as bonds backed by the federal government are considered among the safest investments out there. For more on the difference between Series I bonds and TIPS, check out “9 Safe and Smart Investments for Retirees.”
Bonds
Falling interest rates may mean that yields on new bond purchases will be lower than they were in the recent past. However, if you lock into longer-term bonds or make purchases in a bond mutual fund before rates start to fall significantly, you might benefit from higher returns on those purchases.
Just be aware that with this strategy, you are betting that interest rates will fall and stay lower than they are today. There is no guarantee of that happening, however.
Peer-to-peer lending
Peer-to-peer lending allows individuals — such as yourself — to lend money to others who need the cash. In return, you earn a little extra via the loan’s interest rate.
Well-known peer-to-peer lending sites include Prosper and Upstart.
Of course, this approach is not without risks. If the borrower defaults on the loan, you could lose your cash, for example.
Stocks
As interest rates climbed higher in recent years, some folks may have been tempted to trim their exposure to stocks. After all, if you can get a risk-free 5% return in a savings account or another ultra-safe option, why subject yourself to the stomach-churning volatility of the stock market?
But when interest rates fall, returns on such investments tend to turn increasingly paltry. That could force some people to wade back into stocks.
Just consider your time horizon before moving cash savings into stocks. While they tend to offer better returns than any other type of investment on this list, stocks are also high risk. In the event of an economic downturn, you might have to leave your savings in stocks for many years before you can sell at a profit. So the stock market isn’t a good place for savings that you might need to access soon.
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