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How the Fed’s rate hike can help you boost your savings

Updated March 22, 2023, 8:20 PM UTC
Photo illustration of a repeating pattern of one dollar bills rolled up.
The APY tied to deposit accounts like your high-yield savings account or certificate of deposit (CD) is loosely tied to the federal funds rate.
Photo illustration by Fortune; Original photo by Getty Images

Today, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points in an effort to curb rising inflation, lifting the target for the benchmark Federal funds rate to a range of 4.75%–5.00% range. This is the second rate hike this year and the ninth consecutive rate hike since March, 2022.

The last two rate hikes have been significantly smaller than the 50 to 75 basis point increases in 2022, which could signal that the Fed’s moves are working and the inflation rate is moving in the right direction toward their 2% target. However, in a statement, the Fed noted that additional rate hikes may be necessary: “The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

While this latest increase of the Federal funds rate may be making headlines for its potential influence on the economy at large, these changes have a way of filtering down into your own finances. When rates rise or fall, areas of your personal finances like your debt, your employment situation, and even your savings account will all likely be impacted in a big way.

A few key terms you should know: 

  • Annual Percentage Yield (APY): The amount of interest your savings account earns in a given year. 
  • High-yield savings account: A type of savings account that offers a higher yield on the money you keep in your account than traditional savings accounts. 
  • Certificate of deposit (CD): A type of savings account that pays interest in exchange for setting aside money for a fixed period.
  • Fixed APY: Rates that remain unchanged for a set period. 
  • Variable APY: Rates that fluctuate depending on economic changes. 

How the Fed’s rate hike can impact savings accounts 

When the Fed hikes rates, this can raise the cost of borrowing, making it more expensive to take out a loan, raise your credit card APR, or lead to layoffs within companies looking to cut costs. However, higher rates do carry a major benefit: The APY on your savings account (like your high-yield savings account or certificate of deposit) will likely increase along with it and you may have the opportunity to earn a bit more interest on your savings. The opposite is true when the Fed decreases the federal funds rate.

According to the FDIC, national deposit rates stand at about 0.37%, but this figure varies depending on the type of savings account you have. 

"Higher interest rates slow spending and encourage savings among households and businesses,” says Steve Rick, chief economist at CUNA Mutual Group. “This reduction in spending and investment will slow economic growth and inflationary pressures.” 

In light of recent bank failures, opening a new savings account may give you pause, but you shouldn't let it deter you from taking advantage of higher yields—as long as you do your homework and research your financial institution. The FDIC’s BankFind Suite can help you determine if your bank is FDIC-insured, this insurance offers coverage up to $250,000 per depositor, per bank, for each account ownership category. You can also contact the FDIC by phone to verify that your bank is a member. 

How savers can take advantage of a higher rate 

If you’re unsure how to use this latest hike to your advantage. Here are a few ideas: 

  1. Shop around for the highest possible rate: When rates rise, brick-and-mortar financial institutions, as well as online banks and credit unions may raise rates to attract new customers and remain competitive in the space. Take advantage of a changing economic climate by shopping around and comparing the rates being offered to you across various savings products. You may also benefit from promotional offers that could waive or lower your opening deposit or monthly fee. 
  2. Boost your savings: Take this time to revamp your budget and see where you can make cuts and reallocate funds into your savings. If you don’t have a budget, don’t sweat it. Budgeting strategies like the 50/20/30 method or zero-based budgeting can help you figure out where you may be overspending and how to reorganize. 
  3. Let compound interest work for you: Sometimes one of the best ways to build your savings and earn interest is to keep your hands off your savings. When you make frequent withdrawals, you’re lowering the principal balance in your savings account and reducing the potential interest you may earn. If you have a hard time not dipping into your savings, consider putting your money in a CD that will incentivize you to save and not spend your savings with a higher, fixed rate and penalize you if you withdraw money with an early withdrawal penalty. 

The takeaway 

Rate hikes can sound like bad news, but that may not be entirely true. While they could have some negative impacts on you if you carry steep debt balances, they could also work to your advantage if you act quickly and lock in a higher rate on your savings account that your future self will thank you for. 

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