The Federal Reserve has made a 50 basis point emergency cut in response to the spread of Coronavirus, moving the Fed Fund rate to a target of 1.00 to 1.25%. The market is pricing in the likelihood of further cuts on that March and April meetings.
Under any circumstances, we expect savings rates to move down to the new level within the coming days, and perhaps even lower over the coming months.
However, if you believe that Coronavirus presents a long term risk to the economy and do not anticipate needing access to your cash in the near or intermediate term, you may want to look at longer term rates. Best two-year CD rates are here.
The stock market is crashing. Anyone in it is losing a fortune this week. The temptation may be to try and follow Jon Najarian’s crazy option trades and be a hero, but as a veteran of 2000 and 2008, I can guarantee you that is going to lead to further heartache. Market valuations remain elevated by any historical metric and with the possibility of a global recession caused by Coronavirus, they certainly could have further to fall.
I did not properly predict that bond yields could fall to their current levels. I don’t think they could have possibly ever gotten to these levels without Coronavirus, but they are here. And, while I have been wrong before, I remain certain that the risk of putting new money into bonds, even US Treasuries, with the 10-year at 1.20% is extraordinary should rates move the other way.
And, while cash feels awfully good right now, the reality is that bond yields and Coronavirus are going to force Fed Chair Jay Powell to cut savings rates. Today’s surveys indicate a 100% probability of a 25 basis point cut in March, and at least a 50% probability of another 25 basis point cut in April. If this happens, you will not be earning 1.70% on a savings account in 2 months.
No Penalty CDs are the best and easiest way to protect your savings from the possibility of falling interest rates. We introduced our readers to them last year in this article and also highlighted their benefits here.
No Penalty CD rates peaked in 2019 as high as 2.60% APY from Purepoint (Ally got as high as 2.30% and Marcus got as high as 2.35%). Many locked in those rates and they are not regretting having locked into these yields now.
No Penalty CD rates are much lower now; they no longer offer any premium over savings rates. But, if rates fall further as the market is predicting, locking into one of these products now will enable you to secure a penalty-free interest rate on your savings for the rest of 2020.
Multiple banks offer No Penalty CDs. These include Marcus, Ally, Purepoint, CIT and now CitizensAccess. We list all of the No Penalty CD products among our special CD rates here. At the very least, if you already have a savings account with one of these banks, you should log in now and convert it into a No Penalty CD. If the Coronavirus scare should pass and rates should turn and rise, you can always get out without a penalty after seven business days.
Savings rates are falling and so too are CD rates. A lot of people are reaching out to BestCashCow to complain about falling interest rates, but unfortunately we just list these rates (some folks don’t understand that we don’t set them). It is disappointing and frustrating for savers.
This is the time of year when many also find their taxes to be frustrating. Unless you are a billionaire who lives in a state with no personal income tax (Florida, Texas, Washington, etc.), you are probably cutting checks for a whole lot of the interest that you earned last year as a result of Trump’s “tax cuts”.
These dual frustrations have contributed for more than a decade to asset price inflation and probably led many into the stock market who shouldn’t be there. We like to stay away from stock market prognostications on BestCashCow, but suffice it to say that I do not see the entire market advancing much from here. Under any circumstances, it seems like a bad time to allow yourself to be drawn so heavily into the market that your allocation to equities is well above your comfort level. It also seems like a bad time to be rushing hastily into bonds. Against the backdrop of tremendous uncertainties in 2020, holding cash in the form of savings accounts and CDs is critical.
To boot, while these miles are going to be reported on a 1099 at the end of the year, they are going to be reported at only 42 basis points (or 42/100ths of a cent) per mile. With all the bonuses currently being offered, $250,000 deposited at Bask Bank will earn 296,000 AAdvantage® miles over the next twelve months and generate a tax liability of only $1,239.
$250,000 deposited in a savings account over the next year is going get you just over $4,250 in fully taxable interest over the next twelve months (assuming you are able to continue to get a 1.70% APY rate through the year). The low return and the high tax rates on the full amount could be very frustrating to you this time next year.
