Here are 3 money moves to make before the Federal Reserve lowers interest rates (2024)

FAQs

What would cause the Federal Reserve to lower interest rates? ›

Not only inflation but a potential deterioration in the job market could also prompt the Fed to reduce interest rates to safeguard the U.S. economic expansion.

The Fed has three major tools that it can use to affect the money supply. These tools are 1) changing reserve requirements; 2) changing the discount rate; and 3) open market operations.

Late last year, the Fed was widely expected to cut the benchmark federal-funds rate in 2024 as many as six times. But at the conclusion of its June 11 and 12 policy meeting, the central bank is expected to announce that it's keeping its rate target between 5.25% and 5.5%—right where it's been since July of 2023.

Here are 3 ways to earn attractive returns for years to come instead. LPL says to consider shifting from cash to medium-term bonds as the Fed plans rate cuts. Options for medium-term bonds: ETFs, separately managed accounts, and bond ladders. Medium-term bonds also offer protection in a recession.

If inflation is too high, we can raise rates to make credit more expensive. This will cool the economy, reduce inflation expectations and bring inflation down. If inflation is too low, we can lower interest rates and make credit cheaper to boost investment and spending, which raises inflation.

When the Fed cuts rates, the objective is to stabilize prices (control inflation) and stimulate economic growth; as lowering finance costs can spur businesses and consumers to invest as well as borrow.

If the Fed lowers the discount rate, it encourages banks to lend more money (since they can increase their reserves at a lower cost). The result is more loans for businesses and consumers, meaning an increase in the money supply, which spurs economic activity but also leads to greater inflation.

Government backs the money supply.

In the United States, the money supply is backed up by the government, which guarantees to keep the value of the money supply relatively stable.

The Fed uses three primary tools in managing the money supply and pursuing stable economic growth: reserve requirements, the discount rate, and open market operations. Each of these impacts the money supply in different ways and can be used to contract or expand the economy.

Currently, no banks offer an interest rate of 8% on savings accounts. However, some banks provide a 7% APY on checking accounts. These include Landmark Credit Union Premium checking account with an APY of 7.50%, and OnPath Credit Union High Yield checking account with an APY of 7.00%.

Why do older people put their money in savings accounts? ›

Most older adults don't have enough money put aside for retirement—and many face a real risk of outliving their savings. The shortfall each month requires many people to depend on savings accounts or investments to fill the gaps. A large portion of seniors also go into debt just to keep up with day-to-day living costs.

The highest high-yield savings account rates today are offered by First Community Bank (6.00%), MyBankingDirect.com (5.55%), and Sovereign Bank (5.40%). The high-yield savings accounts we highlighted offer interest rates from 4.60% to 5.25% – at least 10 times the national average on traditional savings accounts.

Overview: Certificates of deposit, or CDs, are issued by banks and generally offer a higher interest rate than savings accounts. And long-term CDs may be better options when you expect rates to fall, allowing you to keep your money earning higher rates for years.

If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.

If the Fed lowers the discount rate, it encourages banks to lend more money (since they can increase their reserves at a lower cost). The result is more loans for businesses and consumers, meaning an increase in the money supply, which spurs economic activity but also leads to greater inflation.

Lower interest rates for loans can encourage households to borrow more as they face lower repayments. Because of this, lower lending rates support higher demand for assets, such as housing.

Lowering rates makes borrowing money cheaper. This encourages consumer and business spending and investment and can boost asset prices. Lowering rates, however, can also lead to problems such as inflation and liquidity traps, which undermine the effectiveness of low rates.

When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation's money supply and expands the economy.