Cash Yields Are Going Down. Here’s Where to Move Your Money.

(Illustration by George Wylesol)

The Fed’s expected rate cuts will squeeze yields on cash while borrowers may get a break on loans. How to make the most of it.

The Federal Reserve’s interest-rate cuts are a double-edged sword for consumers: bad for savers, good for borrowers.

The upshot of Wednesday’s quarter-point cut will depend on your household’s mix of assets and liabilities. Do you have a lot of money parked in money-market funds? Are you looking to buy a house, refinance your mortgage, or whittle down credit card debt?

On balance, Fed rate cuts reduce household discretionary income, David Kelly, chief global strategist for J.P. Morgan Asset Management, wrote in a recent note. The decline in income from money-market funds and other instruments generally exceeds savings on mortgage and other debt. Most mortgages are fixed, so they won’t adjust lower on Fed action, and the majority were issued at low enough rates that they won’t benefit from refinancing, Kelly notes.

That said, there are steps consumers can take to make the most of what’s to come. “This serves as a wake-up call for people to at least check how they’re thinking about their cash and where to make risk allocations going forward,” says Jerome Schneider, head of short-term portfolio management at Pimco.

Here’s what to consider:

Savings

Cash rates have drifted down over the past year, but they’re still attractive—in the 4% range for money-market funds, high-yield savings accounts, and other products. Expect to lose a quarter point on money-market funds after the Fed cut by that amount on Wednesday, although it usually takes a little time to filter through; yields on high-yield savings accounts don’t move in tandem with the benchmark rate, but generally trend in the same direction. Yields on both will keep falling if the Fed follows through with a couple more cuts this year, which policymakers project the economic data will justify.

Assuming the Fed keeps cutting, cash will no longer provide “the warm blanket of comfort” that savers are used to, Schneider says. Bonds are also in the crosshairs, including short-term Treasury bills that many investors use instead of money markets to earn a little more income.

For bond investors, the end of this era means a return to a more active approach, Schneider says.

Rather than park in short-dated Treasury bonds, investors should consider diversifying into asset-backed securities, short-term commercial paper, and higher-quality corporate bonds, all of which provide more yield without much additional risk. Schneider’s fund, the Pimco Enhanced Short Maturity Active exchange-traded fund, invests in these securities. While its current yield of 4.3% will fall, Schneider says, it will most likely be a more gradual decline than money-market funds experience.

Also, keep an eye on your sweep accounts. These are accounts where brokerage firms park unallocated cash that’s waiting to be invested—for example, after you roll over a 401(k) into an individual retirement account. Some brokerages automatically sweep cash into money-market funds, while others don’t.

A Vanguard study last year found that nearly half of investors didn’t realize their contributions were allocated to cash by default. By the time they get around to investing—months or even years later—they may have missed big gains in the stock market. The differential only grows as cash rates decline. (If you’re deliberately in cash and earning less than, say, 1%, switch to a money-market fund to get a better yield, even after the Fed cuts.)

Adjusting to a lower-yielding environment involves managing your expectations. Earning less on your cash doesn’t mean you should reflexively reach for yield by loading up on junk bonds for their comparatively high 6.5% payout.

Nor does it necessarily mean you should hold less cash. Investors who have overallocated to cash in recent years because of the plump, risk-free yields could begin to rotate into bonds and equities. But everyone needs some cash, even if it isn’t as lucrative as it used to be.

Financial advisors generally recommend that workers hold at least three months’ of expenses in a liquid account in case of job loss or other emergency, while retirees should hold at least a year’s worth to insulate them from stock market swings.

If you haven’t opened an online high-yield savings account, it isn’t too late, says Ken Tumin, a writer at DepositQuest.com. Even as rates fall, these accounts will offer better yields than traditional bricks-and-mortar banks, and they’re a good spot for your emergency cash. Be wary of teaser rates offered by traditional banks, which might make them seem competitive with online-only banks but are usually only good for a matter of months, Tumin says.

For cash you don’t need immediately, consider locking in a rate on a no-penalty certificate of deposit. Goldman Sachs’ Marcus currently offers a 4.15% rate on a seven-month, no-penalty CD. If you do end up needing your money before the term is over, you won’t have to pay to access it after the first seven days.

Borrowing

The real estate market has limped along for the past couple of years, hobbled by low inventory, high prices, and interest rates much higher than their pandemic lows. Home buyers may be hoping for a break on mortgage rates as the Fed cuts, but they shouldn’t count on it.

Mortgage rates don’t move in lockstep with the federal-funds rate but instead track the 10-year Treasury , which is sensitive to concerns about monetary and fiscal policy. The rate on a 30-year, fixed-rate mortgage has fallen to 6.35%, but it’s unclear where it will go from here.

“Even though there’s a lot of hope that the Federal Reserve lowering rates will send mortgage rates lower, there’s no guarantee at all,” says Matt Schulz, chief consumer finance analyst at LendingTree.

Take last September, when the Federal Reserve cut interest rates after raising them sharply to cool inflation. In mid-September 2024, the average rate on 30-year loans was 6.2 %, according to Bankrate’s national survey. Yet as the Fed cut rates at three meetings in a row, mortgage rates rose above 7%.

On Wednesday, Federal Reserve chair Jerome Powell said that lower interest rates should boost demand in the housing market to some extent and lower costs for builders. But he also mentioned the “deeper problem” of a nationwide housing shortage that’s weighing on the sector.

Refinancing activity is expected to pick up as rates fall. Home buyers generally start to consider refinancing if rates decline at least a half point from what they’re currently paying, says Keith Gumbinger, vice president at HSH.com, a mortgage-tools site with an online calculator to help determine if refinancing makes sense.

Adjustable-rate mortgages might seem more attractive in a rate-cutting environment, but it isn’t so simple, Gumbinger says. Most of the ARMs on the market today have fixed interest rates for the first five or seven years, so those facing a reset would be homeowners who selected an ARM back in 2018, when fixed rates were in the mid- to upper-4% range. There are probably very few homeowners who will see any change in their rate if the Fed cuts as expected, he notes.

Homeowners are sitting on a lot of home equity, and tapping it can help solve some financial problems. Consumers struggling with debt can use a cash-out refinancing to refinance their first lien mortgage into a new mortgage. Taking out the difference between the old loan and the new loan as cash can help pay off obligations such as credit card debt or auto loans.

Another way to tap home equity is through a home equity line of credit, which can be tapped as needed, like a credit card. Rates on Helocs move in lockstep with the federal-funds rate and will decline when the Fed acts.

Credit card rates also closely track the benchmark Fed rate, but declines won’t translate into huge savings for those carrying a balance, Schulz says. “Any change is welcome,” Schulz says, “but don’t expect it to go from ‘awful’ to ‘awesome’ overnight.”

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com