Lock in a solid savings rate

NEW YORK (Money) -- "Neither a borrower, nor a lender be," Shakespeare advised. But after last week's half-point cut of the federal funds rate, savers are the ones who might be taking a hit.

Consumers parking their cash in savings accounts, bank-issued certificates of deposits and money-market funds can expect a decline in interest yields in response to the Fed's announcement.

For CD investors, that means there's a small window to lock in good rates. Typically, CD yields begin to decline before an anticipated Fed rate cut, says Greg McBride, senior financial analyst at Bankrate.com. "We didn't see that this time around, but now [there is] a catalyst for CD rates to fall," he says.

If you plan to save money in a long-term CD, don't waste any time. "Interest rates are definitely not going to get higher, so if you can grab 5 percent, lock down your money," says Zoltan Pozsar, senior economist at Moody's Economy.com.

While the current national average yield on a one-year CD is 3.76 percent, there are opportunities to secure a better rate. Countrywide Bank, for example, is offering 5.65 percent on a one-year CD with a minimum deposit of $10,000.

Does depositing your cash with ailing Countrywide make you nervous? Don't worry - funds up to $100,000 are FDIC-insured. "That's as close to a free lunch as I can think of," says McBride. "You're protected."

Savers socking money away in money-market accounts will definitely feel a pinch, said Pete Crane of Crane Data LLC: "There is no secret to money-fund yields - they follow the Fed. They will drop, and drop rather quickly." Currently, money funds pay between 4 percent and 5 percent. That spread will drop to 3.5 percent and 4.5 percent, said Crane.

Crane concedes that some of the dip in money-market yields may be offset by fund managers buying higher-yielding asset-backed commercial paper. "The decline may get diluted or delayed slightly," he said. "But it's coming - there's no doubt about that." It may pay to shop around for the best deal, but if you have a block of cash for emergency savings worth less than $10,000, opt for a money market fund from a big name that consistently performs well, like Vanguard or Fidelity.

And what of the attractive 5 percent yields that many online banks have touted to attract customers in the last year? "They'll most likely have to lower their rates," said Jim Bruene, publisher of the Online Banking Report. "But I don't think it will be automatic. Five percent is the magic number in savings. If you're playing in that market, you don't want to be the first to go below it."

McBride agrees: "You'll see the yields come down but probably not by the half-percentage point. Banks are going to be reluctant to blink first and lose deposits to competitors."

Bruene added that some banks may drop the yield on current accounts while still offering a higher yield to new customers and to those who convert. Because it will require some action - even if it's just to select a different kind of account to maintain the higher yield - banks will be able to trim their funding costs for those customers who fall asleep.

"By design, the interest rates can change at any time on a liquid account," said McBride. There's a good chance your bank doesn't have to notify you of the change - and if they do, it will probably be disguised in fine print.

The lesson? "It's worth it to pay attention and keep your eye on your account," says Bruene.

Just be careful about chasing yields by taking on greater risk through junk bonds and other unsafe ventures, advises McBride. "You don't want to be adding risk to the portion of your portfolio that's supposed to be your safe and secure money."