Strategies to Keep Your Savings Earning as Interest Rates Drop

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When the Federal Reserve meets in mid-September it has signaled it is ready to start reducing the key interest rate it controls. That is going to reduce what you can earn on your emergency savings accounts and certificates of deposit (CD).

I not only want you to understand what is about to happen—and why—but also consider one move you can make before the Federal Funds rate ticks lower to keep your savings earning as much as possible.

Let’s start with a super quick refresher course on how the Federal Reserve’s policy moves impact savings rate. The Fed controls an important interest rate called the Federal Funds rate. A bunch of interest rates are tied to the Fed Funds rate, including what you can earn on savings accounts to what you’re charged for an unpaid credit card balance.

When the Federal Reserve is concerned that the economy may be at risk of overheating it will raise the Fed Funds rate as a way to increase borrowing rates, sort of like tapping the brakes to slow down spending. That’s what happened starting in early 2022 when inflation flared up. Between March 2022 and last summer, the Federal Funds rate was increased multiple times, from near 0% to around 5.3%, where it has held steady for more than 12 months.

The head of the Federal Reserve, Jay Powell said in late August that at the next Fed meeting (Sept 17-18) it’s time to start lowering the rate, now that the rate of inflation and job growth have slowed.

The initial rate cut will likely be 0.25 percentage points, but it could be as much as 0.50. What’s important is that once the Fed starts reducing the rate, it will likely make more cuts at subsequent meetings. The Federal Reserve members who have a vote on what the Federal Funds rate should be are periodically asked to project where they think rates will be in the coming year. In the most recent round of projections, the most common estimate was for the rate sometime in 2025 to land between 3.9% and 4.4%. That’s a lot lower than the current 5.3%.

And that means you will earn less on savings in regular savings accounts and money market mutual funds (MMMF) in the coming year as the Fed lowers the Federal Funds rate.

One way to continue to earn the highest safe savings rate is to put some of your money in a certificate of deposit.

If you have more than eight months to a year of living costs in a savings account, you might want to consider shifting some of your safe savings to a CD. And those of you who are retired, you know that in addition to having an emergency cash savings account, I want you to keep at least two years of living costs in cash. Certificates of deposit are a smart option for this as well.

Unlike savings account and MMMF rates that change quickly when the Federal Funds rate changes, CD rates are steady for the term of the CD. For example, if you open a 1-year CD with an interest rate of 4.75% you will earn that 4.75% for the entire year, even if the Federal Funds rate falls during the year.

You might also want to consider building what is called CD ladder: you can put some money in a 1-year CD, some in a 2-year CD, and maybe some in a longer-term CD. That way you will have some of your savings continuing to earn today’s high rates for at least a few years, as regular savings rates decline.

For those of you with an account at a discount brokerage, you can also easily buy U.S. Treasury notes. Like a CD, the rate you get when you buy is the annual interest you will earn until the note matures. You can buy a 2-year, 3-year or 5-year note. Just remember that you also need to have plenty of savings set aside in a regular savings account as well. That money is so you can cover any emergency expenses that may arise during the period when you own a CD or Treasury notes, as it's best not to cash those in early.

Consider this the last call for 1-year CD rates of 4.5% or more. By mid-September rates will be lower.

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