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6 smart money moves to make before and after Fed rate cuts (and 4 to skip)

Yahia Barakah
Updated
6 smart money moves to make before and after Fed rate cuts (Pla2na via Getty Images)

After the Federal Reserve's third rate cut in December 2024 and with rates expected to hold steady at the January 28 and January 29 meeting, you may wonder how to protect your savings and retirement income.

While the series of cuts in 2024 — including September's half-point cut and quarter-point cuts in November and December — helped borrowers, they created challenges for retirees and others who rely on interest income from high-yield savings accounts (HYSAs) and certificates of deposit (CDs). We've seen HYSA and CD rates gradually decline from their peak levels in 2024.

While the Fed is expected to keep rates unchanged at its January meeting, Fed officials project just two quarter-point cuts for 2025 — a more conservative outlook compared to their earlier forecast of four cuts. These anticipated changes will continue to influence the economy and affect our personal finances in both subtle and obvious ways.

As someone who watches these rate movements closely, I know how important it is to act strategically with rates. Whether you're looking to lock in today's CD rates, maximize your savings returns, or make smart borrowing decisions, here are the key moves to consider while rates hold steady.

In this article

There are several strategic moves you can make with your money and finances to better position yourself for the next federal funds rate cut.

There’s still time to maximize the passive income you earn by opening a high-yield savings account.

For example, after comparing traditional and high-yield savings, I realized I was earning an annual percentage yield (APY) of 0.01% on my everyday savings account. At the same time, some high-yield savings accounts pay out 4.00% APY or more, making them well worth the switch.

Here’s an idea of the earnings potential I’d miss out on with my traditional account versus an HYSA on a $10,000 deposit:

$10,000 at 4.00% APY

$10,000 at 0.01% APY

After 1 year

$10,400

$10,001

After 3 years

$11,249

$10,003

After 5 years

$12,167

$10,005

The best part is that the money I earn on my initial deposits also earns interest, adding a compounding effect that translates to a lot more money in my pocket over time. And since it’s all in a savings account, I can easily access my funds when I need them.

Even after the Fed's three rate cuts in 2024, you can still find HYSAs offering more than 4.00% APY early in 2025.

Dig deeper: What is compound interest? How compounding works to turn time into money

While high-yield savings accounts are a useful savings tool, they come with variable interest rates that can change with the market — and drop with benchmark rate cuts from the Fed. That’s where CDs come in: Certificates of deposit allow you to lock in a fixed APY today that stays the same over the entire term of your CD.

For example, opening a 12-month CD that earns 4.50% today means you'll continue earning 4.50% over the entire 12 months, even as HYSA interest rates drop. That's a guaranteed return of about $450 on a $10,000 deposit with daily compounding.

However, keep in mind that you should only use cash that you won’t need for a while. Most CDs impose penalties on early withdrawals, which would diminish your returns. Luckily, by building a CD ladder into your savings strategy, you can divide your money among several CDs of varying terms — for example, from 6 to 36 months — to gain access to portions of your money over time.

Dig deeper: How CDs work — including 7 types that can boost your savings

With experts anticipating the Fed to lower several times in 2025, now is an excellent time to review your investment and retirement portfolios.

The stock market typically benefits from lower federal funds rates, while bonds often yield smaller returns when Fed rates are low. That’s why I spoke with my financial advisor and called my retirement portfolio manager to discuss moving some of my bond allocation over to stocks in anticipation of weaker rates.

Just make sure that any changes you make fit your risk tolerance and plan for retirement. Don’t be afraid to speak with a trusted financial advisor who specializes in retirement. And keep in mind that investment performance is far from guaranteed, so lower Fed rates don’t promise improved stock returns.

Dig deeper: Our editor picks for the best low-cost investment platforms to put your money to work

Get matched with a trusted financial advisor in 4 steps

You have a fresh set of opportunities after the Fed cuts its benchmark rate. Here are some of my favorite money moves to make when rates go down.

When rates start to slide, it’s the perfect time to rethink your existing debt, because you might be able to replace an existing loan with a new one — ideally with a lower interest rate or more favorable terms. This is known as loan refinancing options.

Like many Americans, I have loans that I’d rather pay over time. This includes my five-year car loan, which currently sits at a balance of $25,000 and 6.00% annual percentage rate. Even a small rate drop of 0.50% can save me over $300.

While car loans can be worth refinancing, especially with bigger rate changes, other loans like mortgages often benefit more from refinancing due to their larger balances and longer terms.

But remember that refinancing your loan may come with its own costs. For example, refinancing your mortgage typically costs you an origination fee for the new loan along with various smaller fees and charges to cover the appraisal and paperwork needed (though you might be able to negotiate costs with your lender, among other ways to save on your loan).

The average mortgage refinancing costs $5,000, according to the Federal Home Loan Mortgage Corporation. So make sure to factor in any fees you may incur while moving your loan to new terms or a new financial institution.

From a new fridge to an upgraded garage, many large purchases can strain your finances, especially if you plan to pay for them over time. But if you plan to borrow to cover a high-price cost, you'll pay less interest on your loan after rates come down.

Depending on where you shop, you could even qualify for a promotional 0% APR on your large purchase, which would eliminate your borrowing costs altogether. Car dealerships and appliance retailers are among businesses that typically offer 0% APR financing terms during periods of lower interest.

That’s why I waited on the Fed to cut rates a few times before I upgraded my kitchen cabinets (although judging by their condition, I should have done it sooner!). But overall, timing big-ticket items like home renovations or updates with interest-rate cycles can lower your overall costs. And in the meantime, you can shop around, collect ideas, get quotes — and even sock away money in high-yield savings while you wait.

When the Federal Reserve cuts its benchmark federal funds rate, it lowers how much it costs to borrow across the U.S. Whether you’re considering a debt consolidation loan — a type of loan that combines multiple debts into one new, lower-rate loan — or a mortgage for your dream home, waiting until a rate cut to get a new loan will result in more manageable monthly payments.

That said, you shouldn’t take out a loan simply because it’s more economical. Instead, think about whether a new loan can serve your long-term financial goals. For example, a debt consolidation loan should help you pay off your debts faster and save you enough money on interest to justify the loan. Similarly, a home mortgage should align with your income, needs and overall financial plan.

If you do decide to take out a loan after the Fed cuts its benchmark rate, make sure to shop around and carefully read and understand each loan's terms and conditions. I’ve found that credit unions often offer competitive rates, so I typically start by comparing their offers to traditional banks and online lenders.

Dig deeper: What is a personal loan? How it works — and what to know before you apply

Fed rates and their influence on interest rates is a double-edged sword, whether they’re high or low. When interest rates are high, they make it easier to earn passive interest income, while low interest rates make it cheaper to borrow. Make sure to avoid these common pitfalls after the Fed cuts its rates:

  1. Neglecting savings. Low rates don’t mean giving up on earning interest or moving all of your money out of your savings account. When interest rates plummeted to a five-year record low in 2020, I was tempted to find a better use for my savings balance by investing it in stocks. However, keeping my nest egg intact proved instrumental in outlasting the volatile economic conditions at the time.

  2. Overborrowing. After years of high interest rates, it can be tempting to overspend or borrow more than you need when interest rates fall. However, whether it’s a luxury car or a bigger house, make sure any money you borrow makes sense for your financial situation.

  3. Ignoring refinancing opportunities. While you shouldn’t rush into new debt, don’t miss the opportunity to refinance existing high-interest loans. For example, the right refinancing of your mortgage can save you thousands of dollars in the long run, even accounting for refinancing fees. Review your existing loan against refinancing rates and terms before applying.

  4. Going after teaser rates. When considering a promotional financing offer on a new purchase, take your time to read the fine print to understand the terms. If the starting rate lasts only a limited time, prioritize paying off the balance before a higher rate kicks in — or have a plan for tackling your payments at the higher rate.

Dig deeper: When’s the next Federal Reserve meeting? The FOMC — and how it affects your finances

Learn more in our growing personal finance library to save money, earn money and build your wealth:

Learn more about how the Federal Reserve can affect how you save, borrow and invest.

Buying bonds after a Fed rate cut isn’t a good idea, as the yields of newly issued bonds typically decrease along with the Federal Reserve's benchmark rate. On the other hand, buying bonds before a Fed rate cut is a smart money move as it allows you to lock in high yields before they decrease. Overall, bonds can provide safer returns on your invested money when compared to stocks, allowing them to play an important rule in your financial wellness.

The Fed rate influences mortgage rates indirectly. When the Fed adjusts its federal fund rate, it impacts banks’ borrowing costs. This change ripples through the bond market, affecting bond yields. Since mortgage rates are typically tied to such bond yields as the 10-year Treasury yield, they tend to move in the same direction as Fed rate changes. However, this correlation isn’t perfect or immediate, as inflation, housing demand and other factors play into lender mortgage rates. Learn how much a 1% rate change can matter to your borrowing costs.

Robo-advisor apps can help you dip your toe into retirement planning or management without fully committing to an advisor. This automated approach tends to cost less than an advisor and gives you control over managing your assets. They also have low account minimums to get started — if there’s a minimum at all. Learn more in our guide to robo-advisors.

The federal fund rate is a specific type of interest rate. It’s a benchmark rate defined by the Federal Reserve that specifies the interest banks charge each other for overnight loans to maintain their required reserves. By making changes to this rate, the Federal Reserve is able to have broad influence on the economy. Interest rates is a general term that typically refers to the cost of borrowing money or the potential earnings on deposit accounts, like savings accounts or CDs.

Editorial disclaimer: Information on this page is for educational purposes and not investment advice or a recommendation to buy any specific asset or adopt any particular investment strategy. Independently research products and strategies before making any investment decision.

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia's expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Article edited by Kelly Suzan Waggoner

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