Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How the Fed Rate Pause Is Hurting Your Savings
Transcript
- Lucas: So the Fed has effectively paused — the effective federal funds rate sits at 3.63 percent, down just slightly from last month. And the market is now pricing in no cuts for the rest of the summer after that hot jobs report on Friday. Luna: Right. And I've already started seeing my high-yield savings account rate drop. Like, not dramatically, but it's definitely ticking down. Lucas: That's exactly what's happening across the board. Banks are cutting deposit rates faster than the Fed moves. Even with the Fed on hold, the average online savings yield has slipped about 15 basis points in the last month. Luna: But why would banks cut rates if the Fed hasn't cut yet? Their cost of funds hasn't gone down. Lucas: Because they don't need deposits as badly anymore. During the tightening cycle, banks competed hard for deposits — some were offering 5 percent or more. But now, loan demand has softened, and they're sitting on more liquidity. So they quietly trim the rates they offer to savers. Luna: So the pause itself is hurting savers, even without a rate cut. Lucas: Exactly. And the current inflation backdrop makes it worse. The CPI reading from April came in at 332.4, up from 330.29 — so prices are still rising. Core CPI at 335.4. Meanwhile, your savings account might be yielding 3.8 percent now instead of 4.5. That's a real yield that's gone from slightly positive to probably negative. Luna: What does that mean in dollar terms? If someone has, say, 20 grand in savings? Lucas: At 4.5 percent, that's $900 a year in interest. At 3.8 percent, it's $760. So you're losing $140 annually, and with inflation running around 2.5 to 3 percent, your purchasing power is still eroding. The 10-year breakeven inflation rate is at 2.36 percent right now, which tells you the bond market expects inflation to stay above 2 percent. Luna: So it's a double squeeze — lower nominal yield plus persistent inflation. Lucas: Right. And the temptation is to chase yield by moving into riskier assets. But that's not always the right move, especially with the S&P 500 down 2.8 percent in the last five days. The Nasdaq's off over 5 percent. So equities aren't providing a safe harbor right now either. Luna: Let's talk about what people can actually do. If you're sitting on cash you need in the next year or two, what's the play? Lucas: First, don't panic and move your emergency fund into stocks. The key is to shop around. Some online banks are still offering competitive rates — they're just not advertising as loudly. Also consider Treasury bills or money market funds. The yield on a 3-month T-bill is still around 4.2 percent, and it's state tax exempt. Luna: But T-bills have a minimum, right? And some people find them less convenient. Lucas: You can buy them through a brokerage for as little as $100, or use a money market fund like VMFXX which yields about 4 percent and lets you access cash instantly. The point is, there are options that still pay better than the average savings account, and you don't have to lock up your money for years. Luna: So the message is: don't just let your bank silently lower your rate. Be proactive. Lucas: Exactly. And it ties into something we talk about a lot on this show — being deliberate with your money. Which brings me to something I want to mention. Luna: Go ahead. Lucas: We keep this show free of ads and sponsors. That's a deliberate choice. We want these conversations to be about what actually helps you, not what a bank or a brokerage wants to sell you. Luna: Yeah, and that's pretty rare in personal finance content. Most shows are either selling a product or trying to get you to click an affiliate link. Lucas: Right. So if you find value in what we do here, and you want to support the ad-free model, there's a simple way to do it. It's buy me a coffee dot com slash fexingo. No subscription, no perks, just a way to keep this independent. Luna: And it really does help. It means we don't have to compromise the content for a sponsor's talking points. Lucas: Alright, back to savings rates. So another thing to watch is what the Fed does next. The market is currently pricing the first cut in September at the earliest, but if the jobs data stays strong, that could push into 2027. Luna: If that happens, deposit rates will likely keep drifting lower. What about longer-term bonds? Are they worth considering? Lucas: The 10-year Treasury yield is around 4.1 percent. If you lock that in now, you're getting a positive real yield versus the 2.36 percent breakeven. But you take on duration risk — if rates go up, the bond price drops. So only if you can hold to maturity. Luna: That's a lot of ifs. For most people, the simpler move is just to switch banks. Lucas: Absolutely. It takes 15 minutes online. Open an account at an institution that's still paying 4 percent or better. There are several. And don't forget credit unions — some are offering competitive rates too. Luna: So we're basically saying: the Fed pause is a signal to shop around, not to sit still. Lucas: Exactly. The worst move is to do nothing and let your purchasing power erode. Inflation is still here — CPI at 332.4, core at 335.4. The Fed is on hold, but your savings shouldn't be. Luna: Alright, good advice. Let's leave it there for today. Lucas: Thanks for listening. We'll be back tomorrow with another angle.