As the federal government looked to lower interest rates across the US, Miami banks, as well as banks across the US, began to lower interest rates offered on certificates of deposit in anticipation of an official announcement by the Federal Reserve. This trend came weeks ahead of the Federal Reserve’s major meeting this week, where it was expected to cut the Overnight Federal Funds Rate in the wake of decreased inflation across the nation. The Federal Reserve last increased rates in July 2023, and has seen stability since then, prompting the call to reduce rates. George Joseph, president and CEO of Dade County Federal Credit Union, said banks and other financial institutions take many factors into consideration, with the Federal Reserve’s actions and possible actions being chief among them. “When [the Federal Reserve] meets, they make a decision based on multiple things that have been going on in the country. The interest and borrowing rates between one financial institution and another, they take a look at the treasury market, they take a look at what’s going on in the economy. There’s no one particular thing that they look at but … most banks, credit unions and financial institutions look to them for an indication of what’s going to happen in the market in the future, and it’s all affected by any sort of change,” Mr. Joseph said. Currently, Dade County Federal Credit Union is offering certificates of deposit at an interest rate of 4.5%, which Mr. Joseph stated is competitive for the Miami market, taking projected Fed rate decreases into account. “What we do is take into consideration the indications of what’s going to happen, but we also look at what other banks and credit unions in our community are doing, and so we try to price ourselves competitively, depending on what everyone else is doing,” Mr. Joseph said. According to Raul Diaz, a senior investment officer at Northern Trust, rates were near zero percent before the Federal Reserve began increasing them in March 2022 to combat inflation, which has receded from 9% to 3%. Most banks have been offering certificates of deposits with rates above 5%, with Northern Trust’s fluctuating depending on individual customers. “Depending on the term of the CD, the longer the CD is, the smaller the rate is, because the CD is a fixed interest rate for that period of time. If a bank is giving somebody a three-month CD … they have the opportunity to reprice that. If the Federal Reserve cuts rates once or twice within that three-month period, the bank has the opportunity to reduce that rate when they renew it. But if they’re giving somebody a one-year CD, the bank’s locked into that rate for a year,” said Mr. Diaz. Mr. Diaz estimated interest rates will be dropping one percentage point over the next year according to the Fed Fund Futures, a significant amount of interest in the long run for investors. “1% is 20% of 5%, so if someone is living off this money, their income could come down 20% because they were making 5% on their money, now they’re making 4%,” said Mr. Diaz. Many banks were estimating that the Federal Reserve would cut rates by 25 to 50 basis points during this week’s meeting – by 0.25% or 0.5%. “On the high end expectation, short-term rates will drop 25 basis points, with an outside chance of them dropping 50. If you’re looking at longer-term CDs, you’re probably seeing banks already were dropping rates because … three months ago, we all kind of expected the Fed to cut rates now in September, and then again maybe once or twice this year, so … banks are looking out that 12-month time horizon and looking if the Fed cuts rates in December. they’re factoring that rate cuts into the price of CDs that would be still outstanding during that term that the Fed’s cutting rates,” said Mr. Diaz. “I think what we have seen and … will continue to see is investors shopping around for different alternatives within the short-term space. Some investors will be comparing CD rates with US Treasury bills, which will have a competitive rate … similar to that of CDs. We also have clients at money market funds that are not locked up in terms of the term, like a CD. Money market funds have daily liquidity, so we have people depending on their cash needs looking at those alternatives as well.” According to Mr. Diaz, one of the highest concerns for investors is flexibility in terms of access to money, as well as securing a high enough yield on the interest of investment. “For those looking for cash alternatives, they should expect that yields are going to come down. Since July of last year, investors have been earning … 5%, 5.25% on their cash,” said Mr. Diaz. If “the Fed cuts rates by one percent over the next nine months or so, investors should expect their cash yield to come down about the same as the Fed’s action.” Mr. Diaz advises investors to consider the diminishing yields and their current needs, such as how quickly they need their money, but that CDs would still be a stable source of investment, even as rates decline. “There is a possibility the federal reserve cuts rates more than expected, at which point, they would have been glad to lock their interest rates today, if in fact the Fed is more aggressive in cutting rates going into the next 12 months than is currently being anticipated,” said Mr. Diaz. Mr. Joseph advised similarly for his customers, as well as encouraging them to diversify their assets in a number of safe investments so as to best guarantee returns, as well as to act quickly before rates diminished more. “I basically try to strategize in that I have some CDs, obviously, and then I have a little bit of money in investments with a brokerage house, in addition to that, I have my 401k, I try to make sure I balance everything. So, when you consider all those things, and then any kind of Social Security you may be entitled to in retirement, that’s kind of how I make my decision, and that’s what I would recommend to anybody out there who’s trying to determine where they should put their money,” said Mr. Joseph. “Obviously, the best way to do it, especially for young people out there, is to do some sort of a weighted average investment. Over time, if you invest a small portion of your paycheck every two weeks or every month up to a certain percentage of that, over the next 20 years or so, some months you might be buying a little higher, some months you might be buying a little lower, but in general, look at what the stock markets have done. Over time, your money will begin to grow – you just have to be consistent.” Related Posts:Bank marketing strategies shift to CDs, money market fundsCDs face changing interest rate environmentInterest rate drop pivotal to residential realty healthWary eyes on higher Fed interest rateMiami-Dade County invests very short term awaiting rate hikeThe post Anticipating Fed’s action, banks trim CDs interest appeared first on Miami Today.