What Should Savers Do After the Fed's First Rate Cut in 2025?

The Federal Reserve has announced a rate cut of 0.25 percentage points, bringing the federal funds rate down to a target range of 4.00% to 4.25%. This decision is poised to reduce borrowing costs but may also lead to lower interest rates on savings accounts and certificates of deposit (CDs). Those with money in high-yield savings accounts should be proactive in securing the best rates available before they decline further.

Last updated: 01 November 2023 (BST)

Key Takeaways

The Federal Reserve's recent rate cut may lead to lower savings account yields.
High-yield savings accounts currently offer around 4% APY.
Certificates of deposit (CDs) are also likely to see yield reductions.
Monitoring your account rates and switching if necessary can help maximise earnings.
Acting quickly to secure current rates is advisable, especially before the next Fed meeting in late October.

Understanding the Impact of the Federal Reserve's Rate Cut

When the Federal Reserve lowers interest rates, it typically aims to stimulate economic activity by making loans cheaper. This strategy is particularly relevant in times of economic slowdown, characterised by rising unemployment and decreasing productivity. The recent cut reflects these conditions, as outlined by Federal Reserve Chair Jerome Powell during a speech at the Fed's annual symposium in Jackson Hole, Wyoming, in August 2025. Powell indicated that the economic outlook warranted such a shift, leading to this historic decision.

What Does This Rate Cut Mean for Borrowers and Savers?

For borrowers, lower rates mean reduced costs on loans, including mortgages, car loans, and credit cards. However, for savers, the implications are less favourable. Financial institutions often lower the annual percentage yields (APYs) on savings accounts and CDs in response to rate cuts. Consequently, while loans become cheaper, the interest earned on savings may also decline.

Current Trends in High-Yield Savings Accounts

As of now, high-yield savings accounts offer rates around 4% APY. However, experts predict these figures may decrease as banks adjust their rates following the Fed's decision. Adam Stockton, head of retail deposits and lending at banking analytics firm Curinos, emphasises that although rates may dip, they are not expected to plummet to zero as they did in previous years. He highlights that the Fed's long-term target rate range is projected to be between 3.00% and 3.50%, suggesting a potential further decline in savings rates but not a return to the zero-rate environment of the past.

Strategies for Maximising Savings in a Low Rate Environment

Given the current economic landscape, it is crucial for savers to adopt proactive strategies to ensure they are earning competitive interest rates on their deposits. Here are some recommended actions:

Monitor Your Savings Account Rates: Check your high-yield savings account's APY regularly, ideally every month, to ensure you are still getting a competitive rate.
Consider Switching Accounts: If your current savings account no longer offers a competitive rate, research alternative accounts that may provide better yields.
Act Quickly on Certificates of Deposit: With current one-year CD rates around 4.10% and five-year rates closer to 3.80%, securing these rates before further cuts is advisable.
Understand Compounding: The sooner you deposit your money into a high-yield account, the more interest you can earn over time; compounding can significantly increase your savings.

Why Certificates of Deposit Could Be a Smart Move

Certificates of deposit offer a fixed interest rate for a set period, allowing savers to lock in current yields. They are particularly appealing in a fluctuating interest rate environment. However, it is important to remember that CDs are best for funds that you can afford to keep untouched, as early withdrawal penalties can diminish or even negate earned interest.

The current rates for one-year and five-year CDs represent some of the highest seen in recent years, making it a strategic time for savers to consider these products. As rates are expected to fall, acting sooner rather than later can secure higher returns.

What Happens Next? Future Rate Cuts and Market Implications

The Federal Reserve's next meeting is scheduled for late October 2025. Depending on market conditions, there may be further rate cuts on the horizon. This uncertainty means savers should stay informed and prepared to act on any changes that may affect their savings rates.

Conclusion

The Federal Reserve's recent decision to cut interest rates presents both challenges and opportunities for savers. While lower rates may reduce the yields on high-yield savings accounts and CDs, there are still ways to maximise your earnings. Act swiftly to secure current high rates before potential further cuts, and continue to monitor your options. Staying informed is key to maintaining a healthy financial outlook in these fluctuating economic times.

As the economic landscape continues to evolve, how will you adapt your savings strategy? #Finance #SavingsTips #InterestRates

FAQs

What is the current federal funds rate?

The current federal funds rate is now set at a target range of 4.00% to 4.25%, following a recent cut by the Federal Reserve.

How will the rate cut affect my savings account?

The rate cut is expected to lead to lower yields on savings accounts, as banks typically respond by reducing their annual percentage yields (APYs).

What should I do if my savings account rate drops?

If your savings account rate drops below competitive levels, consider researching other high-yield accounts or switching to a different bank offering better rates.

Are CDs a good investment now?

Yes, certificates of deposit (CDs) currently offer attractive rates, making them a viable option for savers looking to lock in returns before rates potentially fall further.

How often should I check my savings account rates?

It’s advisable to check your savings account rates approximately once a month to ensure you are still earning a competitive yield.