Where to Put Your Money Before the Next Fed Meeting

The extremely high interest rates that have benefited savers are likely to come down over the next year, and sooner than you might think. The Fed is expected to cut interest rates at its meeting next week. Experts had expected a rate cut of between 0.25% and 0.50%, but the “mixed August CPI report” has lowered expectations, with most calling for a 25 basis point or 0.25% cut, according to Dan Burrows, an investment expert at Kiplinger. Any rate cut from the Fed will ripple through financial markets, impacting the rates consumers pay on their debt and the gains they make on their savings.

The bright side is that debt with variable interest rates should become cheaper to repay, such as credit cards, adjustable-rate mortgages or home equity lines of credit (HELOCs), and some private student loans. The downside is that once the Fed cuts rates, we’ll likely see a decline in top savings rates.

Now is the time to make decisions about your short-term savings goals and ways to grow your money. Remember, the longer you wait, the lower the savings rates available will likely be.

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Here’s where you should consider parking your money before lower rates take effect:

Fixed rate engraved on metal lock

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Certificates of Deposit (CDs)

When you invest in a CD while rates are high, you’ll keep your highest rate no matter how much rates fall nationwide. This feature makes CDs the best way to lock in the 5% savings rates that CDs have been paying since the Fed started increasing rates in 2022.

It took several years for rates to reach these highs. The average annual rate on three-month CDs in January 2020 was 1.65%. A COVID-induced recession prompted the Fed to cut rates to near 0% in March 2020. By June 2021, average three-month CD rates had reached a low of 0.09%. In 2022, the Fed began raising rates to manage inflation and avoid a recession. The last rate hike was in July 2023, and the Fed’s higher rates have driven average three-month CD rates to 5% or more.

CDs are a reliable and effective way to earn guaranteed returns of more than 4%. Many banks offer 5-year CDs with rates above 4%, and some 1-year CDs offer rates well above 5%. Read 4 CDs to Check Out Before a Fed Rate Cut for recommendations from Kiplinger savings expert Erin Bendig.

The biggest potential downside is the penalty you could incur if you cash out your CD before maturity. If you’re worried about tying up your money, you can buy a penalty-free CD and avoid the anxiety and fees. These CDs typically offer slightly lower rates to offset the risk of early repayment by the bank. Otherwise, this FDIC-insured savings opportunity is the best place to park your money when rates drop.

Conceptual image of a pink piggy bank inside a red box with a glass lid and a hammer with the text saying

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Money Market Accounts

Money market accounts combine the best features of savings and checking accounts. You get a higher rate than a traditional savings account, but you still have access to the funds through checking privileges and/or debit cards. The interest rate on these accounts is variable and may decrease after the account is opened.

Accessibility to your funds is why I highly recommend these types of accounts to keep your emergency funds. You can easily pay your mortgage, car insurance, or medical bills in case of a financial emergency.

Pay attention to minimum balance requirements that are common for money market accounts. Many accounts have minimum balance requirements to open an account and a minimum daily closing balance. To avoid these fees, do the math and, if you’re about to deplete your emergency fund, close the account and cut your losses before the fees add up.

teenage boy holding cell phone with conceptual digital piggy bank on screen

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High Yield Savings Accounts

All savings accounts earn interest. The amount of interest depends on the account you choose. A traditional savings account only offers an average annual percentage yield (APY) of 0.61%. By comparison, the best high-yield savings accounts have APYs of 5% and up, according to Bankrate.com. That’s why I recommend high-yield savings accounts to everyone, regardless of the Fed rate; even when rates go down, a high-yield account will still be one of the best and safest places to put your savings.

The two biggest drawbacks to high-yield accounts are monthly fees and variable interest rates, but there are ways to mitigate these drawbacks. We can recommend at least 10 no-fee high-yield accounts that are currently yielding more than 5%. Whether overall rates are going up or down, high-yield savings accounts with the best yields tend to consistently outperform their competitors. Monitor the rate your account is earning, and if you notice that your savings account is dropping faster than others, consider looking for a better account.

If you need more encouragement to open a high-yield account, read Is It Worth Opening a High-Yield Savings Account Before the Next Fed Meeting?

Bottom line for savers as we anticipate lower APYs

If CDs, high-yield accounts, or money market accounts fit your short-term savings goals, now is a great time to get them. The longer you wait, the lower rates will likely be.

Lower interest rates can make saving less attractive and borrowing more affordable. As rates drop, you should consider paying down high-interest debt. This will “save” you money by reducing your debt load and your monthly debt-servicing expenses. This would free up more income that you could use to save for a down payment on a home, college tuition or retirement.