The Fed’s new era begins. Here’s what it means for your money

By Jeanne Sahadi, CNN

(CNN) — The Federal Reserve may have a new chairman in Kevin Warsh, but it still has to balance its old dual mandate: Lower rates to boost the economy when the labor market is struggling, or raise rates to cool economic activity when inflation is considered too high.

Well, the job market seems to be doing better than expected. But inflation is now at its highest level (4.2%) in three years — and double the Fed’s oft-stated target of 2%.

Nevertheless, the Federal Reserve on Wednesday opted not to raise rates. But nine Fed officials penciled in at least one rate hike this year.

Whether that actually happens remains to be seen. But in the meantime, you can take steps now to improve what you earn on your savings and pay on your debts.

Savings: Tougher to find inflation-beating rates

The average bank savings yield was just 0.61% as of mid-June, according to Bankrate. You’ll do much better putting your money in one of the options below, although for the first time in a few years it will be harder to find rates that handily beat inflation.

You’re more likely to see yields on par with or slightly below the latest inflation reading. Nevertheless, they still can do a lot to limit inflation’s damage.

Online high-yield savings accounts: For savings you need easily accessible, you’ll get the best variable rates in FDIC-insured online high-yield savings accounts.

The best rates on offer this month are around 4%, according to Bankrate.

A handful of banks offer even more. The top four highest-yielding accounts that Ken Tumin, cofounder of DepositQuest, found had rates between 4.21% and 4.40% as of Monday. But rates at the biggest banks ranged from 3% to 3.4%.

Certificates of deposit: If you’re willing to lock up your savings for a fixed period of time, a bank-issued FDIC-insured CD offers guaranteed growth at a fixed rate.

Currently, the best rates on CDs that you buy direct from a bank are around 4%, per Bankrate.

You also can buy one through your brokerage, which will offer CDs from banks around the country. For instance, on Schwab.com, annual average rates for CDs ranging in durations from three months to three years were between 4.0% and 4.40% on Wednesday morning.

To maximize the interest you earn, don’t withdraw money until the CD matures. Before buying a CD directly from a bank, know what the early withdrawal penalty is. If you buy a brokered CD, instead of an early withdrawal penalty, you risk losing some of your principal if you have to sell it before it matures for less than you paid in the open market.

You will owe federal, state and local income taxes on any CD interest you earn.

US Treasuries: Treasury bills (which mature in 1 year or less) and notes (which mature in two to 10 years) offer a solid return on cash you might need to tap within the next few years. Average yields on Treasuries ranging in duration from three months to 10 years offered on Schwab.com were between 3.74% and 4.43% on Wednesday morning.

With Treasuries, the interest income you earn is exempt from state and local taxes.

Inflation-protected securities: If inflation is your top concern, a Savings I-Bond or a Treasury Inflation-Protected Security (TIPS) might help. The structure and rules for each are different. But both can help preserve your money’s purchasing power.

“For savings that may be needed within the next year or two, high-yield savings accounts, money market funds and short-term Treasuries remain more appropriate because they provide greater liquidity and stability,” said certified financial planner Sue Gardiner of South County Wealth Planning.

But, Gardiner added, “TIPS and I-Bonds can be useful for a portion of longer-term savings.”

Money market funds: These funds offer a one-stop option to make sure your savings are always earning more than a traditional bank account.

Your money won’t be insured by the FDIC as a bank account is. But money market funds are considered safe since they invest in very short-term debt like US Treasuries and high quality short-term corporate debt.

Such funds typically do not outpace inflation – although in the past few years they have, per Morningstar.

As of Tuesday, the average 7-day yield on money market funds was 3.45%, per Crane Data.

Your debts: Don’t wait on the Fed

Unless and until the Fed embarks on a drastic rate-cutting campaign, it is up to you to find ways to minimize the interest you pay on your debts.

Your credit cards: The average credit card rate is punitive – 19.56% as of June 10, according to Bankrate.

Your best bet if you can’t pay off your balance in full: See if you qualify for a balance transfer card to get up to 21 months to pay what you owe interest-free. If you can’t, see if you can get a good rate on a personal loan. The average rate on personal loans was 12.28% as of June 10, but those with great credit scores might get a rate as low as 6.2%, per Bankrate.

Don’t qualify for either option? Make every effort to pay far more than the monthly minimum required. Otherwise, you could pay an obscene amount in interest relative to your original balance. (See for yourself using this Bankrate minimum payment calculator.)

When your credit card debt is unmanageable, check with the National Foundation for Credit Counseling about what other options might be available.

Your home: The 30-year fixed-rate mortgage averaged 6.52% as of June 11, according to Freddie Mac.

Mortgage rates track movements in the 10-year yield, which itself moves on expectations of what the Fed may do as well as broad economic indicators.

Barring changes to the economic outlook – or to the expectation that the Fed will hike rates once this year – the 30-year fixed rate may remain where it is now, maybe a little lower, said Chen Zhao, head of economic research at Redfin. “For the next six months we’re expecting the rate to stay at pretty elevated levels.”

If you’re buying a home this year, you may reduce your borrowing costs if you consider something other than a 30-yr fixed rate mortgage, Zhao said. “Talk carefully with mortgage lenders to find out about all the possible products you qualify for – and what they would mean for your monthly payment.”

If you already own a home and want to refinance, only do so if you qualify for a rate that is at least 50 basis points below your current one, she said.

Your car: Auto loan rates don’t move in lock step with the Fed funds rate. For example, the average rate has come down much less for new cars (0.2 percentage points) and used cars (0.9 percentage points) than the 1.7-percentage-point-drop in the Fed rate between August 2024 and May 2026, according to Edmunds.com data.

Partly that’s because the best auto loan rates are offered on 60-month loans and the average term of a loan is now over 70 months.

Plus, during the same August 2024 to May 2026 period, the average amount borrowed has gone up by almost $4,000 for new cars (to $44,324) and by $2,525 for used cars (to $30,577). So, too, have borrowers’ average monthly payments, which have risen by $42 to $779 for new cars; and by $30 to $578 for used cars.

“Potential rate hikes later in the year could push those figures into record territory,” said Joseph Yoon, Edmunds’ consumer insights analyst. “Until we see substantial dips in rates, buyers will keep stretching loan terms to keep payments affordable.”

Alternatively, two ways to keep your costs down: Improve your credit score to qualify for the lowest rates. And shop for less expensive cars, if you can.

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