The Fed Just Raised Interest Rate Hikes. How Will That Impact Savings Account Holders?

The Federal Reserve has been trying to solve the problem of inflation for well over a year now. Beginning in March 2022, the central bank began raising its benchmark interest rate in an attempt to slow the pace of inflation.

And the Fed's efforts have worked. Last month, annual inflation was measured at 3%, per June's Consumer Price Index. And while that's not quite where the Fed wants inflation to be -- it's targeting 2% -- we're getting closer.

In fact, the Fed was so pleased with the progress made on the inflation front that it opted to pause rate hikes in June after 10 consecutive increases. But on July 26, the central bank announced that it would be raising interest rates once again by 0.25%. And while that's not the best news for consumers who are looking to borrow money or who are already carrying credit card balances, it's actually positive news for savers.

Savers stand to benefit from rate hikes

The Federal Reserve does not determine what interest rates different banks offer for products like savings accounts and CDs. Rather, savings account and CD rates are determined by banks on an individual basis.

But when the Fed raises its benchmark interest rate, banks tend to respond by offering up higher interest rates for consumers. And that makes the central bank's latest rate hike not such a bad thing at all for people with money in the bank.

Right now, many high-yield savings accounts are paying 4% interest or more. That's really a risk-free return.

Unlike stocks, whose value can fluctuate based on market conditions, the deposits you put into your savings account are guaranteed, provided your bank is FDIC-insured and you're not putting in more than $250,000 (that limit rises to $500,000 with a joint account). So to be able to sit back and earn 4% or 4.5% on your money without taking on any risk is really nice. And in light of the Fed's latest rate hike, you could soon be looking at an even higher interest rate on your money.

Should you boost your savings now?

Given that there's been talk of a near-term recession, it's a good idea to boost your savings in general. Your goal, in fact, should really be to have enough cash to cover a minimum of three months of essential expenses. And the fact that banks are paying nicely right now should only motivate you that much more.

With that in mind, you don't want to put so much money into savings that you're not investing at all. Over the past 50 years, the stock market has delivered an average annual return of 10% (before inflation), as measured by the S&P 500. Compare that to 4% or 4.5% in a savings account, and over time, stocks are probably a better bet for growing long-term wealth.

But it certainly wouldn't hurt to give your emergency fund a lift at a time when so many financial experts are cautioning consumers to gear up for a broad economic downturn. And the fact that you might get paid a higher amount of interest to do so only sweetens the deal.