Key Takeaways
The Federal Reserve has kept its benchmark interest rate at a 23-year high for a year as part of its fight against inflation, causing higher borrowing costs and discouraging spending. The Fed is expected to cut interest rates later this year, which will be a welcome development for consumers and businesses but will also take away the benefits some savers have enjoyed over the past few years. With interest rates remaining high, financial advisors suggest parking money in high-yield savings accounts and locking in higher interest rates for the long term with CDs. Advisors also recommend that investors reassess their stock portfolios as some sectors perform better in a high-interest environment.
The Federal Reserve could deliver a much-needed interest rate cut later this year to ease pressure on budgets strained by inflation and higher borrowing costs.
If the Federal Reserve decides to cut interest rates, it will be a welcome development for consumers and businesses, but it will also erase the gains that some savers have enjoyed over the past few years.
Before the Federal Reserve adjusts policy to take advantage of the current high interest rate levels, here are some things it can do.
Save quickly for short-term goals
If you're looking to build up an emergency fund or are approaching retirement, now is the time to take advantage of high interest rates.
National Savings Account Annual Percentage Yield (APY) has risen steadily along with the federal funds rate.
According to Investopedia research, interest rates on the highest-value savings accounts have recently risen to 5.55%, more than 12 times the national average for FDIC savings accounts. This means that if you deposit $5,000 in a savings account, for example, you could receive up to $132 in the next six months.
“Many of our clients are content to park their cash in money market funds, which currently offer about 5% yields,” said Corey Osengren, a financial planner in Plano, Texas.
Lock in a high interest rate for the future
The downside to high-yield savings accounts is that most interest rates move in tandem with the federal funds rate, but there are ways to lock in your current level for a little longer.
Certificates of Deposit (CDs) lock in your interest rate for the term of the account. In exchange, you can't withdraw your funds from the CD until the term is over. So if you're saving for a short-term goal, you might want to get a short-term certificate so you can get access to your savings sooner. Going for a longer term locks in a higher interest rate for a longer period of time.
“If clients have CDs and are interested in reinvesting in CDs that mature before September, I would encourage them to do so before the rate cuts,” said Samuel Wagner, an Indianapolis-based financial adviser.
Another way to lock in higher interest rates is through bonds. Financial advisors recommend extending the duration of your bonds. Essentially, you're investing in bonds that will perform better in a falling interest rate environment, Wagner says.
“The strategy behind this recommendation is that bonds issued before the rate cut will increase in value because their fixed interest payments are higher than bonds available on the market after the cut,” Ortengren said.
Reassess your stock portfolio
Financial advisors also recommend revaluing your stock portfolio in preparation for possible interest rate cuts.
During periods of high interest rates, some sectors will do much better than others, and your financial goals will influence how you allocate your funds.
“Maintaining a diversified investment approach can help mitigate the impact of interest rate fluctuations and minimize the need for frequent adjustments,” said Alison Basso, a financial adviser in Middleton, Massachusetts.
This may be especially important for retirees or those approaching retirement, she said.
“By tailoring your portfolio to include a mix of income-producing and growth assets, you can balance your current income needs with your capital preservation and growth goals and adapt to changing financial needs and market conditions,” she said.