The Federal Reserve’s most powerful weapon in its fight against soaring inflation is rising interest rates.
In March, the Fed raised its target federal funds rate by 0.25%, the first rate hike in more than three years. At its May meeting, the central bank raised rates by 0.50%, and in June it became even more aggressive, raising rates by 0.75%, the biggest increase since 1994. The Fed puts warns of possible more rate hikes to come as it tries to calm consumer demand and drive prices down from a 40-year high.
This has led to higher interest rates on credit cards, home and auto loans, home equity lines of credit and small business loans. For borrowers, this means these products are only getting more expensive. But the Fed’s rate hike campaign is not bad news. There is a silver lining for savers.
“Rising interest rates represent a turnaround for savers, as interest income is finally rising, and these higher interest rates will ultimately help reduce inflation,” said Greg McBride, financial analyst. chief of Bankrate, to ABC News. “It’s the opposite of what savers have endured for the past three years when interest rates fell and then inflation took off.”
At the start of the pandemic, when the Fed was cutting interest rates to stimulate the economy, the average rate for a typical savings account was around 0.06%, according to the FDIC. Now, with the Fed’s benchmark rate hike, banks are starting to follow suit, but don’t expect them to exactly mirror those rate hikes. What the Fed is doing with interest rates is just one factor that banks consider when setting rates. They also take into account the amount of money customers have deposited and the amount offered by their competitors.
Some banks, especially online banks, are starting to offer interest rates on savings accounts of 1% or more. But not all bank interest rates are created equal. McBride recommends benchmarking and considering switching banks to take advantage of the latest rate increase.
“You want to put your money where it will be welcomed with open arms and higher returns,” he said. “Online banks, smaller community banks and credit unions offer higher returns than large banks that already have a mountain of deposits.”
Fed Chairman Jerome Powell predicts the central bank could raise rates another 1.75% over the rest of the year to bring inflation back from its current level of 8.6% to target 2% from the Fed. Experts say that if the Fed is as aggressive as expected, the most profitable online savings accounts could exceed 3% by the end of the year.
In addition to high-yield savings accounts, McBride said if you’re willing to commit your money for a few years, then a certificate of deposit or I-bond, which also sees rates rise, might be better suited to your needs. financial goals. .
“Assess the time horizon of when the money is needed, then research the appropriate savings vehicle,” McBride said. “Don’t chase yield and end up locking yourself into something incompatible with your cash flow needs. If you’re evaluating where to put your emergency savings, you’ll need a liquid account first.
No matter where you choose to keep your money, experts agree that you should always be sure to deal directly with a federally insured financial institution.
“There are many online savings accounts that offer competitive returns, federal deposit insurance, access to cash when needed, and don’t require a large account balance,” McBride said. “There is literally something for everyone.”