Federal Reserve rate cut has an impact on future savings returns

The Federal Reserve's altering policy has led to reduced potential returns on savings, certificates of deposit (CDs), and money market funds, ending the era of elevated yields on cash. Financial experts emphasize the importance of keeping emergency funds "liquid," allowing for easy access to cash, despite the declining rates.

Financial Advisors' Recommendations

Financial advisors advocate maintaining a minimum of three to six months' worth of cash reserves for emergencies, such as job layoffs. However, they acknowledge that this threshold may vary based on individual circumstances. Certified financial planner Kathleen Kenealy, founder of Katapult Financial Planning in Woburn, Massachusetts, strongly advises against jeopardizing one's safety net. She recommends securing emergency funds in high-yield savings or a money market fund to ensure their liquidity.

The recent reduction of the federal funds rate by half a percentage point marks the first rate cut since early 2020. This pivotal move by the Federal Reserve has implications for banks' lending practices, as the federal funds rate influences consumer loans and savings rates. Although top yields have slightly diminished, many savers continue to enjoy relatively high rates on cash, with the top 1% average for savings hovering near 4.75% and one-year CDs exceeding 5% as of September 25, according to Deposit Accounts. Furthermore, major retail money market funds were still offering around 5% as of September 24, according to Crane Data.