The Federal Reserve paused its series of interest rate hikes on Sept. 20, leaving 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.
The Fed has gradually nudged rates from near zero in March 2020 to north of 5 percent today, and that has had a big impact on your money. For savers, higher rates are great news: You can now earn 5 percent or more on safe, reliable investments from your bank or brokerage. On the other side of the household ledger, however, higher rates mean bigger loan payments on big-ticket items like automobiles and houses.
Why is the Fed raising rates? Put simply, to slow the economy and reduce inflation. When it’s more expensive to borrow money, businesses and consumers alike are less likely to spend as much of it. That, in turn, slows growth and demand. Here’s more on how the rate hikes 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 warm handshake from a teller.
No longer. Some banks are offering as much as 5.6 percent on a one-year CD, according to Bankrate.com. That’s $560 on a $10,000 deposit. Similarly, ultrasafe, short-term Treasury securities are also offering yields above 5.5 percent. A few online banks are paying 5 percent interest on savings accounts with no minimum balance.
“Online banks, community banks and credit unions have been raising rates to very competitive levels,” McBride says. “Put your money where it will be welcomed with open arms and higher yields.”
Another benefit of higher rates: Inflation has fallen from an annual rate of 9.1 percent in June 2022 to 3.7 percent in August 2023. Although that’s higher than the Fed would like — it’s aiming for 2 percent inflation — it means that savers can get a positive return from their investments after inflation. When inflation was soaring, the combination of low interest rates and rising prices meant that savers effectively lost money after inflation.
Tougher times for borrowers
For those shopping for a new home, rising rates have been as welcome as a flooded basement. A 30-year fixed-rate mortgage is now averaging 7.18 percent, up from a low of less than 3 percent in 2020 and 2021.