How Will the Latest Federal Reserve Interest Rate Hike Impact Savers?

Rampant inflation has been a problem for consumers for roughly two years. And the Federal Reserve is intent on doing something about it. 

The Fed has been raising its benchmark interest rate since early 2022 in an effort to bring inflation levels down. Most recently, the Consumer Price Index, which measures changes in the cost of goods and services, was up 5% on an annual basis. But the Fed wants to see inflation drop down to 2%. It's long maintained that this level of inflation is needed to promote a stable economy. 

Because the Fed still has work to do on battling inflation, on May 3, it made the decision to raise its benchmark interest by 0.25% for the third time this year. And while that's not the best news for consumers looking to borrow money, it's great news for consumers with money in savings. 

Savers stand to come out ahead

The Federal Reserve does not dictate what interest rates banks offer consumers individually. Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing.

When the Fed raises its benchmark interest rate, it tends to drive the cost of products like auto and personal loans up. But it also tends to lead to higher interest rates for savings accounts. So in light of the latest rate hike, consumers with cash in the bank could end up earning more interest on their money going forward. 

It's a good time to boost your savings

During periods when banks aren't paying much interest, it can be hard to motivate yourself to keep cash in a savings account. But right now, many high-yield savings accounts are already paying upward of 4%, and that has the potential to climb even more. 

Remember, deposits at FDIC-insured banks are protected for up to $250,000 per person. So if you like the idea of earning a risk-free 4% or more on your money, then it pays to bump up your savings if you can.

But that's not the only reason to give your savings a boost right now. The Fed has also been warning that a mild recession is likely to hit later on in 2023. 

Now clearly, a mild recession is better than a major one. But the Fed also warns that it could take the U.S. economy two years to recover from even a mild downswing. So the more cash reserves you have, the more protection you buy yourself in the event of getting laid off from your job. 

All told, having extra money in the bank is a very good thing right now. And if you don't have enough savings to cover three months of essential bills, it's especially important that you try to ramp up in case economic conditions decline more quickly than anticipated. 

What about CD rates?

CD rates, like savings account rates, are likely to climb following the Fed's latest interest rate hike. Now's a good time to capitalize on higher CD rates, but make sure to keep your emergency fund in a regular savings account so you have access to that money when you need it. If you have funds beyond that, you can open a CD, but you may want to stick to one with a shorter term to give yourself more flexibility.