How to deal with falling interest rates?

The Federal Reserve cut its target interest rate by half a percentage point yesterday to just 1% in an effort to increase lending in the economy. This is good news for the economy ( although the stock market was mixed on the news) and bad news for savers.

The decrease in interest rates will generally lead to a decrease in the high yield online savings and checking accounts which banks offer right now. It could also lead to a decrease in the yields on the high yield rewards checking accounts as well. The best case for depositors is to invest their money in a stable FDIC insured Certificates of Deposit. If the US is going to experience the same low interest rates environment like Japan has been experiencing for 17 years, then locking your savings in a Certificate of Deposit for one to five years could be the best decision of your lifetime.

Last time the FOMC target rate was lowered to 1%, was in 2003. The Fed Funds rate stayed at that level for over one year. In fact last time the Federal Reserve started cutting its benchmark rate, it took over 7 years for interest rates to reach 5%. Thus if you had locked in your funds in a longer term Certificates of Deposit, your savings would have grown nicely by now and even better, you would have outperformed most stock investors.

For a list of the highest yielding CD's check out this page.

This post was selected on the 37th Carnival of Money Hacks: Wonders of the World