What Fed Rate Moves Mean for Your Money

The Federal Reserve kept interest rates unchanged again on June 12, as recent data shows that inflation isn’t whipped quite yet.

The Fed left its target for the key federal funds rate, which influences everything from car loans to savings accounts, at between 5.25 percent and 5.5 percent.

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In 2022 and 2023, the Fed raised rates repeatedly to slow the economy and reduce inflation. When it’s more expensive to borrow money, businesses and consumers are less likely to spend as much of it. That, in turn, slows growth and demand.

“The Fed isn’t going to cut interest rates until they see further declines in inflation, and even then the Fed will likely cut rates at a much slower pace than the increases seen in 2022-2023,” says Greg McBride, the chief financial analyst at Bankrate.com.

So far, the strategy has worked — somewhat. The consumer price index (CPI), the government’s chief measure of inflation, clocked a 3.3 percent increase during the 12 months that ended in May. The Fed is aiming to keep inflation at 2 percent, as measured by the core Personal Consumption Expenditures (PCE) index, which strips out volatile food and energy components. The PCE rose 2.7 percent in the 12 months that ended in April — still above the Fed’s target.

Still, the Fed signaled plans to eventually cut rates, projecting one reduction this year. In the meantime, savers can get a positive return from their investments. “The great environment for savers continues, as the top-yielding savings accounts, money markets and CDs are among the best in more than 15 years and handily outpace the rate of inflation,” says McBride. Here’s more on how the rate changes can affect you and your money.

Happy days for savers

Although the Fed’s rate hikes have cooled the economy, they have been a gift to savers. After the Fed dropped rates to near zero at the onset of the pandemic, the most savers could get from a bank certificate of deposit (CD) was a thin smile from a teller. 

No longer. Some banks and credit unions are offering as much as 5.1 percent on a one-year CD, according to Bankrate.com. That’s $510 on a $10,000 deposit. Similarly, some ultrasafe, short-term Treasury securities are also offering yields as high as 5. percent. And a few online banks are paying a bit above 5 percent interest on savings accounts, with no minimum balance.

Still tough times for borrowers

​For those shopping for a new home, rising rates have been as welcome as a family of raccoons in the attic. A 30-year fixed-rate mortgage is now averaging 7.1 percent, up from a low of less than 3 percent in 2020 and 2021. The monthly principal and interest payment on a 30-year, $300,000 mortgage loan with 20 percent down at 7.1 percent is $2,047, up from $1,265 at 3 percent.