Video by CBS News
The Federal Reserve announced Wednesday that its open market committee had voted to cut the federal fund rate by 25 basis points to a range of 1
The federal interest rate is the reference rate that banks use when lending to each other. Interest rates on loans and deposits are usually influenced by Federal Reserve's decisions relative to the federal fund rate.
"Banks need to lower deposit rates now in response to the Fed rate cut," said Dan Geller, founder of consulting firm Analyticom. Here's what you shouldn't do now that the Fed has cut interest rates:
Don't Disregard Deposit Certificates
Deposit rates have been falling for months now – the first time it's happened across the board in five years.
As a result, people will earn less substantial returns when they take out a CD these days than they would have in early 2019. But that doesn't mean they should shy away from this savings.
In fact, CDs might be a better bet, Geller said. "If you can get a good return now and you are guaranteed to receive this rate for the next three to five years, you will be cycling the next recession with relatively high interest rates," he said.
Many people make the mistake of moving their cash into liquid accounts, such as high-yield money markets and savings accounts, especially as the threat of a recession melts, Geller said.
The return on these accounts is not & # 39; t guaranteed as it is with a CD. He estimates that Americans lost billions of dollars in interest by relinquishing this fear of money during the recent recession.
"Resist the temptation to think that if you put it in a money market account that it is more accessible to you at a time of need," Geller said. "Even if at some point you have to pay a small penalty for breaking the CD, it's worth it."
Geller's simple rule of thumb for approaching CDs today: Find the highest rate for the longest term.
Don & # 39; Don't just leave your money in a bank account and forget it
A recent Bankrate survey found that nearly 70% of Americans had savings accounts that paid less than 2% interest. At a time when interest rates are falling, it can be a particularly costly mistake.
"Don't let your money sit in a bank and pay a competitive return," said Greg McBride, Bankrate's chief financial officer. He added, "Be prepared to move their money to a bank that pays better returns."
Many online banks offer upside with 2% interest on savings accounts – even in today's climate. These banks will continue to compete for interest rates despite the fact that interest rates overall fall to score more customers.
Don't make major adjustments to your long-term savings plan
The Fed's interest rate decision first sent shares to fall – both the Dow Jones Industrial Average and the S&P 500 both fell in afternoon trading before they recovered – mainly because the central bank failed to clarify it will cut interest rates again later this year.
The markets have been unstable in recent months thanks to monetary policy, an increasingly unstable stock market and President Trump's ongoing trade conflict with China.
As such, it is not time to withdraw money from the market or make significant changes to your pension planning. Instead, experts suggest seeking out healthy distractions such as hanging out with friends or hitting the gym.