Recent news of the federal funds rate cut has many in the financial world buzzing over what it means for credit cards, lines of credit, and deposit accounts. It’s understandable. Americans saw the rate raised four times in 2018 and three times in 2017. The change to the target range for the federal funds rate, which is now 2 to 2 ¼ percent, is significant since it’s the first rate reduction since December 2008. While the Financial Crisis of 2008 may be behind us, savers are rightly concerned over where to park their money for the short-term while yielding the highest return.
Here’s why smart savers shouldn’t ignore this fed rate change and others that might be on the horizon.
What is the Fed Rate?
The “fed rate” is short for Federal Funds Rate, which is set by the United States Federal Reserve System. This rate is periodically adjusted to help maintain financial stability while encouraging consumer spending. Changes to the rate affect not only the cost of borrowing, but also the rate of return or annual percentage yield (APY) on deposit accounts, i.e., savings accounts, money market accounts, and share certificates.
How Fed Rate Changes Impact Savings
Generally, as the fed rate increases, the APY that financial institutions offer to depositors also increases. The reverse is also true. As the rate decreases, the ability to find accounts paying a high-yield also decreases. Smart savers pay attention to fed rate changes since movement in either direction impacts how quickly they can meet their savings goals.
For example:
Regular Savings Accounts
Common Features:
- Ability to access funds without penalty
- Low minimum balance requirements
- Helps limit spending due to the absence of check-writing ability
- Earnings at lower APYs when compared to other deposit accounts (variable APYs may apply)
Suggested for: Savings goals related to a specific short-term (2 years or less) purchase or members looking to build a small emergency fund account.
Money Market Accounts
Common Features:
- APYs are higher than most savings and checking accounts (variable APYs may apply)
- Withdrawals without penalty (limitations apply)
- ATM access to funds
- Check writing ability
Suggested for: Savers with a medium-term (2 to 5 year) financial target such as a down payment on a home or those comfortable with a higher minimum balance requirement and limited check-writing in exchange for higher rates.
Share Certificates
Common Features:
- Guaranteed, fixed-rate APYs which are often higher than the variable APYs associated with savings and money market accounts
- Dividends can be paid monthly or quarterly
- Less financial risk than investing in the stock market
Suggested for: Savings goals that don’t require access to funds for a pre-determined period (ex. 6 months to 5 years).
As interest rates trend downward, savers should compare their options across financial institutions to find competitive savings rates. Locking in rates now with a share certificate might be a smart move for your money.
While APYs for deposit accounts are on the steady decline at banks and credit unions across the nation, SkyOne Federal Credit Union offers members competitive options: a Share Certificates, with a minimum deposit of only $1,000 and a competitive APY Sky-high Savings Account. Lock in a high-yielding certificate or a fully-liquid high-yield savings account today and receive guaranteed stable returns in an unpredictable market.
