We’ve seen an incredible fall in interest rates over the last 12 months.

Bowing to political pressure, Fed Chair Jerome Powell began cutting interest rates on August 1, 2019 from a target rate of 2.25% to 2.50% and continued cutting rates by 25 basis points two more times in 2019 as a result of Presidential harassment.

At the beginning of 2020, the Fed funds target rate stood at 1.50% to 1.75%. Then, when the virus hit US shores, the Fed quickly moved to a zero to 0.25% Fed funds target in order to provide stimulus to the market.

In the months that followed, savings rates and short-term CD rates have tumbled. They may actually have further to fall. In fact, many leading online banks are offering CD rates well below their savings rates, providing a clear signal that they intend to bring savings rates down still further.

I am still getting a lot of emails from readers like the following: “I am in my 60s and I cannot stomach the market. I’ve taken $2 million out of the market and because I cannot find an online bank offering more than 1%, I’ve opted just to keep in at Morgan Stanley where I am getting 0.10%”.

Here is why this strategy is wrong.

First, if you look at the value of compounding, it is important that your cash always be earning as much as it can make. I think it is worth the effort to get an extra $18,000 in interest over the next year, even if you are in a higher tax bracket by locking into 1-year CDs that only pay 1% as long as you don’t need the cash. And, of course, if you do not need the cash until years out, earning 1% now looks even better over time. BestCashCow’s compounding interest calculator can help you further understand the importance of earning as much on your cash as you can over time.

Second, we have inflation in this country, although the virus may ultimately lead to price deflation. One goal with cash in savings accounts and short-term CDs is to maintain your purchasing power. Just this morning, the Consumer Price Index for all Urban Consumers (CPI-U) data recorded a 0.6% increase in food prices from June 2019 to June 2020. For people like the reader who wrote me above, an extra $18,000 a year in income, even if it is pretax income, will help to maintain purchasing power parity for their $2 million base in retirement.

Compare online savings rates here.

See the best online one-year CD rates here.

We are receiving multiple emails every day from BestCashCow's readers who are furious about the pace of falling savings rates, money market rates and short-term CD rates. While we are the most comprehensive and up-to-date source of these rates, we are not setting Fed policy or even having input into the rates at a single bank. So, we are sorry that you opened an account at HSBC when they were offering 1.60% APY two weeks ago only to learn that you were earning 1.01% APY by the time that you had it funded. But, as you are no doubt aware if you are paying attention to the news (not FOX news, but real news), there are people who are dealing with much greater hardships right now.

Here is what you can do with your cash going forward to try to protect yourself from savings rates that look poised to fall below 1%.

First, look at No Penalty CDs. We’ve recommended No Penalty CDs for years. They are a no lose situation since they lock in a rate of return, and allow you to cancel without a penalty anytime after one week. Today, they are being offered by at least 6 banks: Ally, Marcus, Purepoint, CIT, CitizensAccess and CFG Bank. An individual can protect their interest on up to $1.50 million in cash over the next years without going over FDIC limits. A couple can protect up to $3 million. See the rates on No Penalty CD and other special CD products here.

Second, consider 1-Year CDs. Rates are probably going lower as we lead up to the election. A 1.35% one-year CD is not attractive, but it is still better than zero. And, remember that as rates come down, so too do the penalties for early withdrawals as they are ordinarily set in terms of three-months or six-months interest. Some local banks and credit unions may be offering higher rates. You should check those as well.

Third, avoid the temptation to chase much higher rates in products where the return is not guaranteed. Anyone who ever invested in stocks like Teva, CenturyLink, GE or Kodak will tell you that dividend chasing is a fool’s game. And, chasing structured instruments that could yield high returns but could also yield zero while impairing your liquidity is also a fool’s game.

Fourth, recognize where we are. The Fed Funds rate is at zero and it could be there for a while. Earning over 1% on your money is still over 1% more than zero. And, it is important to keep your asset base growing. The same folks who were excited about online savings accounts earning 2.50% last year when Morgan Stanley or Bank of America were offering 1.50% should recognize that the same online savings accounts are still offering spreads just as worthwhile to pursue.

Fifth, think about earning AAdvantage miles through a Bask Bank account. If you believe that you are ever going to be traveling again, then this is a good time to open an account that pays you miles instead of interest. I wrote about Bask Bank several times here and here readers in the comment sections engaged in exercises of trying to determine the value before reaching the conclusion that the account was attractive when savings and CD alternatives were much higher. Now that those rates have come down and Bask Bank’s offer remains the same until June 30, the opportunity is even more attractive. $100,000 deposited for 1 year earns 100,000 miles. BestCashCow conservatively values these miles at 1.90 cents each, but I can still find redemptions in business class seats to Hawaii and Europe where the value is well over 6 cents a point. And, if you act before June 30, you will still be eligible for an additional 46,000 AAdvantage miles on the $100,000 balance over the next year in the form of a sign-up bonus, a feedback bonus and a balance bonus. An additional benefit is found in the fact that Bask Bank’s 1099 will only report the miles at 0.42 cents each.

Learn more about Bask Bank's AAdvantage Miles-earning account here.

Times are tough and may get tougher, but save on!

The Federal Reserve has left the Fed Funds rate at zero to 0.25%, and projected no plans to raise interest rates through 2022. The good news is that it is still not considering negative interest rates in the US.

It is projecting a 6.50% decline in US GDP in 2020.

The Fed sees inflation well below its 2% objective and it sees unemployment at extraordinarily high levels so there is no pressure whatsoever to raise rates. Meanwhile, it remains committed to using all sorts of tools involving its lending programs in order to avoid a collapse in the economy.

Against, this backdrop, it is very difficult to say that cash is exciting. It is safe, it is stable, and it is still going to be trading at face value plus interest if the market loses half of its value as this Coronavirus-induced economic crisis continues. But, compared with the performance of the stock market over the last several months, it is hard to make a compelling case for cash and holding large amounts of it carries the risk of a devaluation of your purchasing power. I suggested recently that folks might want to resist the temptation to go completely into cash, even as the economy deteriorates.

There is another temptation that I also suggest that folks resist and that is the temptation to give up on cash and accept zero returns. All major online banks are still offering yields of over 1%, and 1% is better than zero, especially when you factor in the value of compounding interest rates over time. We received notes from lots of folks who were excited about earning 2.50% instead of 2% this time last year, and while savings and money market accounts feel like trash now, it is just as important in this environment that your cash resources are earning as much they can. You can compare online savings rates here and you should also continue to check local savings rates where you live, here.

Savings alternatives that may preserve the value of your cash while giving you access to something else of value, instead of interest, could be particularly interesting to those whose primary goal is to preserve capital. Bask Bank is offering an account that pays interest in the form of American Airlines AAdvantage miles at 1 point per dollar on deposit per year. Bask Bank also offers bonuses that could total as much as 42,000 American AAdvantage points if you maintain a balance over $100,000 for over a year. Since these bonus are due to expire at the end of June, I think that this is a good time for anyone planning to travel again in the future to look at accumulating miles through this program. Learn more about Bask Bank's offer here.

While this remains a difficult time for savers, I’d encourage folks to look at remortgaging and home equity options, if they are at all inclined.