How the recent Fed rate cuts are impacting various accounts?

Federal reserve has made several decisions in 2020 with the goal to support the economy. The Federal Funds rate was cut essentially to zero. This is the lowest since 2015. How it will impact your accounts?

Savings accounts rates. Savings accounts typically follow the trend of the Fed Funds rates. These rates were marching down since the Federal Reserve started to decrease its rates in 2019. Yet, with the fierce competition among the credit institutions for deposits, some banks can maintain relatively high APY. The online banks’ economics typically allows them to maintain higher rates (and lower them more gradually) vs their brick and mortar competitors. Though some of the online banks made several rate cuts in March-April already.

Certificates of Deposit (CD). The Certificates of deposit with a fixed rate lock cash for a period of time. Yet, in the zero interest rates environment, CDs with the fixed rates are a good vehicle to lock the yield as well. Several institutions have been lowering the CD rates in March-April yet there are still deals out there with APY on 12 months CD in the neighborhood of 1.5%. This can be a good time to shop around and lock the rates if you think you will not need the cash for some time.

Money Market.

Money Market rates typically follow the Fed Funds rates with a slight time lag. While the Money Market funds were a great vehicle when the rates were on the rise, the rates are now declining across the board. The graph illustrates the yield on one of the largest Money Market funds – Fidelity Government Cash Reserves (FDRXX) – in connection with the Fed Funds rates.

As Money Market funds are mutual funds, they typically have expenses associated with them. Therefore, as yields decline, there could be a situation when the net yield (yield minus expenses) could become zero or go in the negative zone. Some fund companies started to waive the fees associated with the Money Market funds to maintain the positive net yields for their investors.

Mortgage. Federal Reserve’s influence on mortgage rates is complicated. Yields on mortgages are more closely tied to 10 years Treasury rates. Yet, in the market economy, they also reflect supply and demand.

The graph illustrates the average US rates for 30 years fixed mortgages (sourced from Freddie Mac) in connection with the 10 years treasury rate. The Mortgage rates hit historical lows in March 2020 (just a tad below 2013 levels). Yet, they slightly bounced back from there by April with the rush of refinancing deals. Will we see more decline in the mortgage rates going forward? While we cannot predict the future, the history tells that with current levels of 10 years treasury yield, we might. It could be a good idea to shop around and keep the refinancing file open to catch the low rates.