The Fed announced in their December FOMC that they were lowering their target federal funds rate “range” to 0.00% to 0.25%, a drop from the former target of 1.00%. While it was seen as mostly a symbolic move, since the actual federal funds rate was much lower than 1.00%, the language surrounding the numbers made it sound like the Fed was willing to do anything to pump up liquidity, including doing something its never done before called quantitative easing. I don’t want to get into the technicalities of everything because for most people, the biggest part of that announcement was that interest rates are going lower.
When the Fed cuts interest rates, the first thing that happens is interest rates on all banking products will go down. As you may remember, savings rates aren’t guaranteed and are variable, they can change at anytime. The same is true for the interest rates on checking accounts, money market accounts, etc. The only rate that is ever guaranteed is on a certificate of deposit (CD) and that’s only locked for the term of the CD.
I currently have our emergency fund laddered in CDs at ING Direct so there will be no changes there. I’ve been slowly rolling over CDs each month into an FNBO Direct CD because their one year rates are half a percent higher (FNBO Direct 12-month CDs are 4.00% APY vs. ING Direct 12-month CDs at 3.50% APY), but it’s been slow going since only one CD matures per month. If you don’t have your emergency fund locked into a CD ladder, you should consider it.
Mortgage rates are falling hard. My friend emailed to let me know that his broker has rates for 30-year loans at 4.50% and Wells Fargo has 4.75% listed on their list of today’s rates. Under 5% for a thirty-year loan is absolutely ridiculous. While we’re not in the position to buy another home, if you were waiting on the fence, now is a fantastic time to start looking because the rates are so low. If and when we do have the ability, I hope that these low rates are still around.
The only rates that will stick are those promotional rates guaranteed by banks. The best example I can think of is Everbank, they’re guaranteeing their 4.01% bonus rate for three months but then they’re going to drop you back down to whatever it is the rates will fall to. Does that mean you should rush out and open an Everbank account? Not necessarily, because we won’t know what the rate is afterwards but that’s the type of high yield savings account that will guarantee a rate for a specified time and still give you the flexibility of moving your funds around. If you don’t lock it into a CD, your rate can change at anytime.
Who knows what will happen in the next few months to the next year with regard to our economy, but the one thing you can be sure of is that banks will be lowering interest rates in the short term.