Why Federal Reserve rate hikes aren’t all bad

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There is one silver lining for your enjoyment.

In case you didn’t know, inflation has been hitting consumers hard for months. Starting in late 2021, it’s getting more expensive to buy everything from groceries to apparel to household items.

The Federal Reserve has been tasked with fighting inflation. And to that end, we have implemented several aggressive rate hikes in 2022.

Now let’s make one thing clear. The Federal Reserve does not directly set consumer interest rates. For example, the interest rate charged to take out a mortgage is not set by the Fed. Rather, the Fed monitors the Federal Funds Rate. This is the rate that banks charge each other for short-term borrowing purposes.

But when the federal funds rate rises, so do consumer interest rates. So it costs more today to take out a car loan or a personal loan than it did a year ago.

Clearly, rising interest rates are not good for borrowers. But the Fed’s rate hikes aren’t all bad. In fact, it has yielded very good results for those who have money in savings.

The savings rate is finally something to celebrate

For many years, interest rates on savings accounts and CDs were so low that people who kept their money in the bank received practically no benefits (other than having a safe place to keep their cash). was not But over the past few months, banks have paid out much more generously than they used to.

These days, it’s easy to find savings accounts that pay interest in the 3% to 4% range, especially if you open a high-yield savings account with an online bank. CDs also mostly pay him 4% or more.

That’s a big improvement from about a year ago when we didn’t even get a 1% return. It also means that many people have a great opportunity to get more in cash without risking it.

Stock market volatility over the past year is a reminder that it’s not a good idea to invest money you might need soon. However, instead of investing, you can put your money in a savings account or CD and enjoy great returns without worrying about losing your principal.

Additional rate hikes may be in the works

Inflation has eased slightly since peaking in mid-2022, but is still well above normal. As such, the Fed is on track to hike rates and consumers should expect him to see more rate hikes in 2023.

Indeed, the Fed may hike rates lower than in 2022. But either way, consumers should expect borrowing costs to continue to rise. It’s not great, but on the flip side, savings accounts and CDs should be more favorable options in the near future. In fact, today’s savings accounts and rising CD rates may encourage more people to keep their money in banks, thereby providing more financial stability.