Freshly squeezed: Savers already feeling the pain ahead of likely start to Fed rate cuts

NEW YORK (AP) — This week the Federal Reserve is likely to cut its main interest rate for the first time in more than four years. It's a momentous move, but savers have been feeling the squeeze for months.

Financial markets and banks try to get ahead of such moves by the Fed, and yields have been dropping on everything from bonds to savings accounts as a result.

Consider a 10-year Treasury note, which holds a central position in many savers' portfolios because of its safety. Early this week, anyone buying a 10-year note could get a yield of 3.70%. In late April, they could have gotten a full percentage point more, 4.70%.

Or, for people who feel they don't have enough cash for a portfolio, consider savings accounts at banks. The national deposit rate averaged 0.46%, according to the Federal Deposit Insurance Corp. That's down from 0.47% in March. Of course, yields much higher than that are still available at online-only and other accounts, including several yielding more than 4%. But even there, yields have dropped in anticipation of a Fed cut.

Rates for certificates of deposit have been more volatile. A one-year CD has an average rate of 1.85%, down from 1.86% at the start of the year. It dropped as low as 1.80% during the summer.

Part of this is by design. By lowering its main interest rate, the Federal Reserve is trying to loosen the brakes on the economy and encourage more activity. Lower rates help borrowers by making mortgages, auto loans and other debt a bit easier to pay off.

Low rates can also encourage savers to move their money into riskier investments in order to make higher returns. That in turn could also help juice the economy. When rates were near zero following the 2008 financial crisis and again after the 2020 COVID crash, investors moved money from savings accounts to bonds and then to stocks in search of better returns.

The danger for investors is moving into something too risky. Cash in a savings account can easily be pulled tomorrow. Put cash into a stock fund, and its price can swing dramatically from day to day. Just look at last week, when the S&P 500 tumbled more than 4% for its worst week in nearly a year and a half.

The big question for savers going forward is how much lower rates will continue to go. Much of Wall Street expects the Federal Reserve to keep cutting rates through the end of this year and into next, potentially bringing its federal funds rate down to about 3% from its current range of 5.25% to 5.50%. .

"With other major central banks also set to continue their easing cycles, cash yields could drop quickly from here," according to Solita Marcelli, chief investment officer, Americas, at UBS Global Wealth Management.