3 things to do (and 3 things to avoid) before interest rates are cut
Inflation has been cooling and that's a sign that the Federal Reserve could cut its federal funds rate soon. The Fed adjusts this benchmark rate in response to economic developments. And, many experts agree that a rate cut will happen at some point before the end of the year.
That's important because changes to the federal funds rate are typically followed by changes to the interest rates financial institutions charge consumers for borrowing money and pay them for depositing it. If the Fed does cut its federal funds rate, you could earn less on deposits, but pay less on loans.
And, you should consider the prospect of a coming rate cut as you make financial decisions. We've outlined a few things you should do and a few you shouldn't with a potential rate cut looming below.
3 things to do (and 3 things to avoid) before interest rates are cut
With a potential rate cut ahead, there are a few financial moves you should make now:
Open a CD
With rates expected to fall ahead, using a certificate of deposit (CD) to lock in today's high returns may be an advantageous move. These are fixed-rate deposit accounts that guarantee the rate you lock in for the entire term.
Of course, you typically have to guarantee that you'll keep the money in its account for the entire term, too. You may be penalized if you access your money before the account matures. Nonetheless, CDs give you a compelling way to lock in today's high rates for anywhere from a few months to several years. And, that's valuable with a potential rate cut looming.
Don't wait for rates to fall. Lock in your CD returns now.
Choose a HELOC over a home equity loan
Do you plan on tapping into your home equity? Home equity loans and home equity lines of credit (HELOCs) are two common options to choose from. But with the prospect of a rate cut ahead, it may be best to choose the latter.
HELOCs typically come with variable rates while interest rates on home equity loans are usually fixed. And, with a potential rate cut ahead, opting for a variable rate over a fixed rate could offer meaningful long-run savings.
Limit your variable-rate savings exposure
Savings accounts offer more flexibility than CDs - making it possible to access your money when you need it. That's important for your emergency savings. But, with an expected rate cut looming, you should limit your variable-rate savings exposure. Think about how much money you need in your emergency savings and consider locking in a strong fixed rate of return on the rest of your money with a CD.
"Aim to save enough to cover three to six months' worth of expenses to cushion against unexpected financial setbacks," explains Justin Stivers, financial advisor and founding attorney at Stivers Law, an estate planning and asset protection law firm. But, once you have that amount in a variable-rate deposit account, like a high-yield savings account, you should consider opening a CD with your remaining savings to lock in today's rates.
3 things to avoid before interest rates are cut
Although there are a few things you should do with a potential rate cut head, there are also a few financial moves you should avoid, including:
Focusing on short-term CDs
When you open a CD, you can choose short-term or long-term options. Short-term options typically mature within a year while long-term options often take several years. With a potential rate cut ahead, and interest rates high at the moment, it may be best to lock in today's high rates for multiple years rather than opting for short-term options.
Selling your gold holdings
The potential for a rate cut is tied to the fact that inflation has been cooling. And, since gold is a strong inflation hedge, you may be tempted to sell your gold investment. But, inflation isn't the only reason you should have gold in your portfolio.
Gold is a safe haven - not just as it relates to inflation, but also against other market risks. Between the current geopolitical stage and the coming election, it's a good idea to maintain a healthy exposure to safe havens. So, selling your gold holdings could be a mistake.
Lock in a fixed mortgage rate
If you're in the market for a new home, you may be weighing your fixed and variable-rate options. But, with rates expected to come down ahead, an adjustable-rate mortgage (ARM) may be a better option than its fixed-rate counterpart. If you opt for an ARM you could benefit from future rate cuts more quickly versus having to refinance with a fixed-rate loan.
Learn more about your mortgage options today.
The bottom line
It's important to adjust your financial plan when rate cuts are expected. Those cuts can impact your savings returns and the cost of borrowing money. But, you can protect your returns by opening a long-term CD with a fixed interest rate. Also, limit your variable-rate savings exposure. If you plan on borrowing money against your home equity, or buying a new home, consider variable rate options as they may produce savings later. And, don't start selling your gold holdings just yet. They may provide valuable protection against market risks outside of inflation.