Savers will suffer from cut in rates
By John Waggoner and Barbara Hagenbaugh
USA Today
The financial turbulence of the past few weeks — capped by last week's collapse of Bear Stearns and the Federal Reserve's slashing of short-term interest rates — has left investors and savers pondering a big question: What do I do now?
With the Fed cutting its key fed funds rate to 2.25 percent from 3 percent, savers will suffer, says Greg McBride of www.Bankrate.com. Yields on bank CDs, money market accounts and money market mutual funds are closely tied to the fed funds rate.
The average one-year certificate of deposit yielded just 2.33 percent last week, the lowest in more than three years, and will likely fall further after the Fed cut, according to www.Bankrate.com. And investors don't receive much extra yield for tying up money for longer periods: The average five-year CD was yielding just 2.94 percent.
What's a saver to do? If your main aim is to keep your money safe, you don't have many options.
"Sometimes, you just have to take what the market gives you," McBride says. But you can be a smart shopper: The highest-yielding bank CDs can offer as much as a full percentage point more than average rates.
If you invest in money market mutual funds, you can boost your yields in two ways:
For bond investors, Treasury securities are the least attractive choice, says Mark Kiesel, portfolio manager at Pimco. A 10-year Treasury note yields just 3.50 percent — less than the current 4 percent inflation rate.
