It was all eyes on the Federal Reserve again this week. At Wednesday’s Federal Open Market Committee meeting, the federal funds benchmark rate went up by a quarter of a percentage point, bringing the new range to 5.25% to 5.50%, the highest level in over two decades.
Since early last year, the Fed has implemented 11 consecutive rate hikes (with a brief pause last month) to try to tamp down record-high inflation. Though rising consumer prices have shown signs of cooling, with the year-over-year inflation rate at 3% in June, it’s still above the Fed’s 2% target goal. The average cost of goods and services hasn’t fallen enough.
“Price stability is the responsibility of the Federal Reserve,” said Fed Chair Jerome Powell at Wednesday’s press conference. “Without price stability, the economy doesn’t work for anyone.”
Under pressure to both keep inflation in check and maintain economic growth, the Fed is tasked with striking the right balance. No one wants permanently high prices, but no one wants endless interest rate hikes either, which have been punishing for borrowers and debt holders.
“On one side, there’s the risk of high inflation, like towering waves that could capsize the ship,” said James Allen, certified financial planner and founder of Billpin. “On the other side, there’s the risk of slowing economic growth, like dangerous rocks lurking beneath the surface. If they steer too far in one direction, they could end up crashing into the other.”
The monetary policy of the Fed has a strong influence over financial markets — and a direct impact on your wallet. With rates increasing again, borrowing could continue to get more expensive, but higher interest rates for savings, money market and CD accounts could get you greater returns on your money.
Below, we’ll unpack what this rate hike means for your money.
Could this be the end of the Fed’s rate hikes?
There’s no way to predict right now whether the Fed will pause rate hikes in September or hike rates once again. In a short amount of time, the Fed has undertaken a sharp tightening of monetary policy, and moving too quickly or hiking rates too soon risks the Fed overshooting and the economy slipping into a recession, said Phil Neuhart, director of market and economic research at First Citizens Wealth Management.
It takes time for the central bank’s efforts to ripple through the system, and the Fed needs to see how different economic factors evolve over the summer.
“Monetary policy works with a lag, so we could potentially see turbulence ahead in various corners of the economy,” said Massud Ghaussy, a senior analyst for investor relations at Nasdaq.
Still, the forecast looks far less cloudy than it did a year ago. Investors and analysts were long concerned that raising interest rates — which makes borrowing and investing pricier and decreases overall demand for labor, goods and services — could usher in a hard downturn and crack the economy. The central bank always said it aimed for a middle ground or “soft landing,” and now Wall Street seems to be more confident of that possibility.
How do the Fed’s interest rate hikes impact savings?
Ahead of the Fed’s recent move, some banks increased interest rates for high-yield savings accounts. There’s a chance that banks could push rates even higher to remain competitive for deposit accounts — but not by much. “The recent Fed rate hike may not have a significant impact on savings rates offered by banks,” said Joe Camberato, CEO of National Business Capital.
