WSJ Your Money Briefing - What Lower Interest Rates Could Mean for Your Cash

Episode Date: September 17, 2024

The Federal Reserve is set to cut interest rates this week for the first time since 2020.  Wall Street Journal reporter Joe Pinsker joins host J.R. Whalen to discuss where financial advisors suggest you put your cash.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

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The Federal Reserve is expected to lower interest rates this week for the first time since 2020. For many people who have capitalized by putting cash into savings accounts or CDs, that means finding a new strategy. The places where people have been enjoying getting a high return on their cash for the past couple of years are basically about to start paying out less than they have been. And the yields on those are expected to drop. It could be within days or weeks of a rate cut. We'll talk to Wall Street Journal

personal finance reporter, Joe Pinsker after the break. I'm not going back to university to be your friend. I'm not going back to university to be your friend. I'm going so I can get Uber One for students. It saves you on Uber and Uber Eats. I'm there for zero dollar delivery fee on cheeseburgers, up to five percent off smoothies and five percent Uber cash back on rides. Just to be clear, I'm there for savings, not whatever you think university is for. Get Uber One for Students, a membership to save on Uber and Uber Eats.

With deals this good, everyone wants to be a student. Join for just $4.99 a month. Savings may vary. Eligibility and member terms apply. If the Federal Reserve lowers interest rates this week as expected, how could that affect getting the most out of where you put your cash? Wall Street Journal personal finance reporter Joe Pinsker joins me. Joe, what do most economists expect the Fed to announce regarding interest rates tomorrow?

The expectation is that the Fed will cut rates and the question really seems to be by how much. 0.25% would be a more typical move, but investors think they might determine that a bigger cut of a half a percentage point would be in order. If the Fed does lower rates, what are the first changes we're likely to see as a result?

The places where people have been enjoying getting a high return on their cash for the past couple of years are basically about to start paying out less than they have been. In practice, this means that the yields on money market funds will go down and the same is true for yields on high yield savings accounts, some of which have been paying 5% or even a little bit more.

And the yields on those are expected to drop. It could be within days or weeks of a rate cut, though there's going to be some variance from bank to bank. Meanwhile, for certificates of deposit or CDs, rates actually already fell a bit in anticipation of a rate cut and are expected to continue declining after the Fed's announcement if they cut rates as expected. How much further could they drop?

This isn't going to be an enormous drop-off, like it's falling off a cliff. It's more expected to be slower and more gradual. So if you're thinking about what to do with your cash, it's not like things change immediately overnight, but it's still a sort of sooner the better if you're going to think of doing something different. What are some common mistakes that people make when they see interest rates begin to move lower?

I was talking with a financial advisor in Milwaukee named Ben Smith, who was saying there are two things that he watches out for in moments like this. And interestingly, these two things are pulling people in opposite directions. The first thing that he warns against is the temptation to chase higher returns by buying stocks in a moment like this. Basically, people get used to earning high returns on their cash and they want to continue that and extend that and preserve that into the future even as yields are going down on cash. But looking to stocks for

that sort of yield can be risky if you're doing it on a short time horizon. And the second impulse, which kind of pulls people in the other direction, is just that they've gotten so used to high returns on cash that they might just keep clinging to it, even as the yields drop. The way that Ben Smith was talking about this was that people have been trained to view high-yield savings accounts as a basic suggest people consider in terms of how much money to move out of those accounts? Yeah, getting a high return on your cash has felt awesome the past couple of years to a lot of people. But the reality of investing is that the returns on cash are never really going to be the thing that's going to make you wealthy. So you really just want to make sure you just have as much cash as you need. And the way that financial advisors typically think about that is having enough in case of an emergency to cover several months expenses, and then also just any other expenses you know you have coming up in the next two or so years,

like putting a down payment on the house or something. But beyond those needs, you should then sort of start looking for other places to put your money so that it grows more significantly than it would if it's just sitting in a high yield savings account. You mentioned the stock market as an option a moment ago. If someone's thinking about moving some money into stocks, how should they approach that? If there's money that when you take stock of the cash that you have right now that you don't need to touch for about a decade or more, that's money that should typically go into a longer term investment.

In your story, you mentioned that some financial planners say that people often overlook the medium term horizon when they might need cash. Why is that a concern? When people think about their money, they're often thinking in terms of kind of two distinct buckets. It's cash I need now or retirement money I don't need for a long time. And that's kind of an oversimplification. There are going to be things that you need money for that are longer than say two years

away but shorter than 10 years away. And for those you might want to look at assets like bonds or CDs because they're less risky than stocks but they still generate higher returns than money that's sitting in a savings account, even a high yield one. Is it okay to do nothing with your cash? I mean, sure, it's okay to do whatever you'd like, but the calculation often comes down to how much you stand to gain by doing the utmost to maximizing the yield that you're getting. 4% or 5% is a nice return to get on cash, but if you're talking about the interest on, say,

a thousand dollars that you have in an account, that percentage over the course of a year is not gonna work out to an enormous number. That said, if you're trying to figure out what to do with a million dollars in cash, that's a very different calculation. I've actually written in the past about how people tend to avoid switching banks

to one that would pay them a higher interest rate because they think that doing so will just be a headache. In reality, it's often not such a terrible experience and doesn't take too terribly long. And if that means even a couple hundred or a few hundred more dollars a year in interest, that seems like not a bad deal for a half hour, maybe an hour of work. No one knows for sure, but when economists look into their crystal balls, what do they expect the Fed to do regarding interest rates through the end of the year? The expectation is for continued cuts.

So what that would mean for everything we've been talking about is that the yields on cash would gradually get smaller and smaller. But of course, as you alluded to, nobody really knows. That's WSJ's Joe Pinsker. And that's it for your Money Briefing. This episode was produced by Ariana Asparu with supervising producer Melanie Roy. I'm JR Whalen for The Wall Street Journal.

Thanks for listening.