Tips for savers, as another Fed rate cut looms

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Savers have gotten a raw deal over the last year as the Federal Reserve has slashed short-term interest rates, dragging certificate of deposit yields down.

But here’s some good news: Even as the Fed gets ready to cut its benchmark rate again this week, you still have time to lock in CD yields. Many banks haven’t been moving very fast recently, if at all, to reduce what they pay depositors.

There’s a logical reason for that: It’s still cheaper for banks to attract consumer deposits than to get funding from other sources.

‘Consumers are benefiting from the fact that banks are still very hungry for deposits,’ said Greg McBride, senior analyst at Bankrate Inc. in North Palm Beach, Fla.

A few numbers tell the story: The last Fed rate cut was on Oct. 8, when the Fed reduced its key rate to 1.5% from 2% as part of a coordinated move with other major world central banks to ease the global credit crisis.

But since then, the average national yield on one-year CDs has slipped just 0.02 of a point, to 2.61% from 2.63%, according to rate tracker Informa Research Services in Calabasas.

And some banks are paying well above the average yields, as usual. Bankrate.com on Monday showed almost 20 banks offering yields of 4% of more on a one-year CD.

Another rate-shopping site to check out: money-rates.com.

‘There are still some good rates to get out there,’ said Ray Montague, manager of deposit research at Informa.

By contrast, if you’ve got cash sitting in a money market mutual fund or other short-term account, your yield is vulnerable if the Fed cuts again this week, which seems a virtual certainty. Wall Street’s consensus forecast is for the Fed to drop its rate by another half-percentage point, to 1%, after policymakers’ two-day meeting concludes Wednesday. (There’s also a chance they’ll make the announcement Tuesday.)

The average seven-day simple yield on taxable money market mutual funds was 1.45% last week, according to iMoneyNet Inc. That was down from 1.62% a week before the Fed’s rate cut on Oct. 8.

The bottom line: This is a good time to lock up at least some of your cash in federally insured CDs for the next six months to one year, if you’re sure you won’t need to tap that money in the interim. If you belong to a credit union, be sure to check its CD yields as well.

I know no one’s going to get rich on a 4% CD. Still, that yield is more than twice what many money funds are paying.

See this earlier post for some other CD shopping tips.