What Fed Rate Moves Mean for Your Money

The Federal Reserve kept interest rates unchanged again March 20, 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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“The Fed continues to signal that it will be ‘slower to lower’ rates, meaning that the first [quarter-point] cuts will start in June or July (rather than March or May) and continue quarterly, totaling 75 [percentage points] by year-end,” says Sam Stovall, chief investment strategist for CFRA, an investment research firm.

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.

So far, the strategy has worked – somewhat. The consumer price index (CPI), the government’s chief measure of inflation, clocked a 3.2 percent increase during the 12 months ended February, down from 9.1 percent in the 12 months ending in June 2022. Although that’s a big decrease in the rate of inflation, prices tend to fall much more slowly than they rise, and many items, particularly food and gasoline, haven’t returned to pre-pandemic prices. Overall, the CPI has jumped 21 percent since the pandemic started in March 2020.

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 2.8 percent in the 12 months ended January – still above the Fed’s target.

Still, the Fed has signaled plans for rate cuts, not hikes, in 2024. For the first time in years, 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. 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 5.5 percent on a one-year CD, according to Bankrate.com. That’s $550 on a $10,000 deposit. Similarly, some ultrasafe, short-term Treasury securities are also offering yields as high as 5.5 percent. And a few online banks are paying a bit above 5 percent interest on savings accounts with no minimum balance.