The Federal Reserve has now cut its key overnight lending rate three times in a row this year. And the effect has been a mixed bag for consumers.
All in, the fed funds rate, as it’s called, is now down a full percentage point from what had been its highest level in more than two decades.
The fed funds rate affects consumer borrowing and saving rates across the US economy, either directly or indirectly. But its downward effect so far has not been very dramatic.
That’s a positive for savers and fixed income investors — who still have plenty of opportunities in the coming months to get an inflation-beating return on their money.
But it’s not such great news for those with debt. Their borrowing rates haven’t moved down that much.
And many Fed watchers expect the pace of rate cuts in 2025 to slow and the size of the cuts, if any, to be modest. The Fed’s latest forecast now projects just two rate cuts for next year, down from the four projected in September.
So, based on what is known now, here is a look at how to position your savings, minimize your debts and best situate your investments for the new year.
Your savings
In its 2025 outlook, Vanguard Investments said it expects that “interest rates are likely to return to neutral levels, which are higher than those in the 2010s, supporting solid returns on cash and fixed income investments.”
How much cash you should keep within easy reach depends on your needs and goals. But at a minimum, consider setting aside half a month’s worth of your living expenses or $2,000 in a liquid account to deal with “spending shocks,” as Brandon King, Vanguard’s head of personal investor cash investments, puts it. That’s money you’ll need if your car breaks down or an unexpected home expense arises.
Similarly, King said, you might want to keep at least three to six months’ worth of living expenses on hand to handle “income shocks” such as a layoff.
These “shock” funds can be kept in an online FDIC-insured high-yield savings account, which pays way more than traditional brick-and-mortar banks. Many are offering yields between 4.5% and 4.9% this month, according to Bankrate.com.
Or you might consider putting those funds in an FDIC-insured money market account at your own bank if it’s offering an attractive yield. Some money market accounts have been offering 4.65% to 4.85% in the past week, according to Bankrate.com. Keep in mind, rates on savings and money market accounts will likely go a bit lower in the wake of the Fed’s rate cut Wednesday.
Another alternative might be a money market fund, which large providers like Vanguard, Fidelity and Schwab are offering in the 4.3% to 4.6% range. Such funds invest in short-term, low-risk debt instruments. The funds are not insured by the FDIC. But if you invest through your brokerage, your overall account is likely to be insured by the Securities Investor Protection Corp.
Whether you’re saving for a down payment in the next few years, or you’re a retiree who wants to keep one to two years of income on hand so you don’t have to pull money from your investment portfolio when the market is down, you might consider fixed income options.
Here, certificates of deposit, Treasuries and high quality municipal bonds might offer good returns. Each have different tax implications and different rules for early withdrawals.
FDIC-insured CDs require you to lock up your money for a given period of time, and the earnings are fully taxable at both the federal and state level. CDs ranging in duration from three months to five years were yielding between 4.1% and 4.5% this week, according to tables on Schwab.com.
US Treasuries of durations between three months and three years were offering yields between 4.23% and 4.3%. Interest earned from Treasuries is exempt from state and local taxes, so may be a better option if you live in a high-tax area.
And AAA munis with durations of three months to five years were paying between 2.66% and 3.87%, according to offerings on Schwab.com. Earnings are typically exempt from federal tax. And if you buy a muni issued by the state where you file your state taxes, they may be exempt from state and local taxes too, according to TurboTax. Again, another good option if you have a high income or live in a high-tax area.
Munis might also be good for some money you don’t think you’ll need for up to a decade. “Muni yields continue to look attractive for residents of high tax states. There are some high-quality muni bonds with a 10-year maturity or longer yielding over 5% on a taxable equivalent basis,” said Sinead Colton Grant, chief investment officer at BNY Wealth.
Your debt
Despite the Fed’s rate cuts, borrowers are generally not seeing notable relief because their rates have been so high.
“Interest rates associated with credit cards, mortgages and auto loans may not see significant immediate impact as a result of this (latest) cut. (But) consumers should continue to monitor them and ensure their overall credit profile is in the best possible shape so that they are able to take advantage of lower rates as they float down,” said Michele Raneri, a vice president at TransUnion.
Credit cards: As of December 11, the average credit card rate was 20.35%, down from a record high of 20.79% in mid-August, according to Bankrate.com. After the Fed’s move Wednesday it’s likely to go down a bit more, but will remain well above the 16.16% average recorded in July 2021.
If you owe money on a retail credit card, your rate is likely much higher, according to a new report from the Consumer Financial Protection Bureau, which found top retailers’ private label cards had an average APR of 32.66% for new accounts.
So, best advice: Forget the Fed. If you’re carrying a balance, move it to a 0% balance transfer card that won’t charge you interest for up to 21 months. That gives you time to meaningfully pay down your principal without having to throw money away on interest.
If you can’t secure a balance transfer card, ask your credit card issuer to lower your rate. “That works way more often than you’d think,” said Matt Schulz, chief credit analyst at LendingTree. “A 2024 LendingTree report showed that 76% of people who asked for a lower APR got one, and the average reduction was more than six points.”
Home loans: Mortgage rates have actually risen since the Fed started cutting rates in September. That’s because those rates are directly tied to the yield on the 10-year Treasury, which moves on economic factors such as inflation and growth, and interpretations of the Fed’s future moves. Since recent economic data has come in strong, the 10-year yield is higher than it was in mid-September.
For the week ending December 12, the average rate on a 30-year fixed rate mortgage was 6.60%. While that’s above the 6.2% registered a week before the Fed’s September meeting, it is still well below where it was a year ago at 7.50%, according to Freddie Mac.
“You know the old adage: Bad news is good news for mortgage rates. There’s really not that much bad news in the economy right now,” said Melissa Cohn, regional vice president of William Raveis Mortgage, who thinks mortgage rates may be settling into a new normal for now.
Home buyers may be disappointed, but for anyone carrying a mortgage at a higher rate than the 30-year average, you might consider refinancing.
“If you can shave one-half to three-quarters of a percentage point off your mortgage rate then refinancing is worth looking into. Realistically that means if you’re carrying a rate of 7% or higher, you’ll want to shop around to see what kind of rate you can get and how much that will save you every month,” said Greg McBride, chief financial analyst at Bankrate.
As for borrowing against your home equity, be judicious. It remains expensive, despite the Fed’s rate cuts, with average rates on home equity lines of credit and home equity loans at roughly 8.5%.
“Home equity lines of credit are not the low-cost source of funds that was the norm for almost 20 years. On existing HELOCs, there are a lot of lenders still charging double-digit interest rates. Pay that down aggressively as interest rates won’t fall fast enough to provide meaningful relief,” McBride suggested.
If you want a HELOC to serve as an emergency lifeline and you never tap it, the rate may be less of a concern. But it still may cost you money by way of closing costs, minimum withdrawal requirements or ancillary expenses, such as an annual fee or inactivity fee.
Your long-term investment portfolio
When it comes to your longer-term portfolio, you don’t want to be so heavily in cash that you forfeit necessary growth of your money, especially as savings and money market rates slowly fall.
For that reason, unless you’re already in or near retirement or have a huge near-term expense (eg, replacing your roof), certified financial planner Chris Diodato would not recommend clients keep more than six months’ to a year’s worth of living expenses in cash or cash equivalents.
And Colton Grant urges sticking with a well-diversified portfolio overall.
For the fixed income portion of your portfolio, she anticipates volatility for bonds ahead, so she favors active management for your bond holdings, whether through a separately managed account in your 401(k) or through an actively managed bond fund.
And on the equity side, she said, BNY has been overweight in US large cap stocks because of their strong free cash flow and productivity gains from AI.
