Why the Federal Reserve's Interest Rate Hikes Aren't All Bad

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KEY POINTS

  • The Federal Reserve raised interest rates multiple times in 2022, and it's likely to continue to do so in 2023.
  • While higher interest rates are bad for borrowers, those with money in savings can benefit from them.

There's one silver lining to enjoy.

In case you haven't noticed, inflation has been wreaking havoc on consumers for months on end. Since the latter part of 2021, it's been more expensive to buy everything from food to apparel to household goods.

The Federal Reserve has been on a mission to combat inflation. And to that end, it implemented several aggressive interest rate hikes in 2022.

Now, let's get one thing straight. The Fed doesn't directly set consumer interest rates. The rate you're charged to take out a mortgage, for example, isn't set by the Fed. Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing purposes.

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But when the federal funds rate rises, it tends to drive up consumer interest rates as well. So right now, it costs more money than it did a year ago to finance a car or take out a personal loan.

Clearly, higher interest rates are not a good thing for borrowers. But the Fed's rate hikes aren't all bad. In fact, they've led to one very positive outcome for people with money in savings.

Savings rates are finally something to celebrate

For years, savings account and CD rates were so low that people with money in the bank were getting virtually no benefit from it (other than having a safe place to stash their cash). But over the past few months, banks have been paying much more generously.

These days, you can easily find a savings account paying interest in the 3% to 4% range, especially if you open a high-yield savings account at an online bank. And CDs are largely paying 4% or higher, too.

That's a big improvement from about a year ago, when you couldn't even get a 1% return on your money. And it also means that a lot of people have a prime opportunity to earn more of a return on their cash without taking on loads of risk.

The volatility in the stock market over the past year is a good reminder that it's not a good idea to invest money you might need anytime soon. Instead of investing, though, you can put your money into a savings account or CD and enjoy a nice return without having to worry about losing out on principal.

More rate hikes could be on the way

Although inflation has cooled a bit since peaking in mid-2022, it's still well above normal levels. As such, the Fed isn't done moving forward with interest rate hikes, and consumers should expect to see more of those in 2023.

Granted, the Fed might implement lower rate hikes than it did in 2022. But either way, consumers should expect the cost of borrowing to continue to rise. And while that's not a great thing, the flipside is that savings accounts and CDs should be a more lucrative option for the foreseeable future. In fact, today's higher savings account and CD rates might inspire more people to sock money away in the bank, thereby lending to more financial stability.

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