How the Fed's interest rate hike can actually help you
Interest rates are heading up once again. On Wednesday, the Federal Reserve announced an increase in rates to a range between 5% to 5.25%. The move marked the tenth time the Fed has raised interest rates since March 2022.
The hike will make it more expensive to use credit cards. Ditto for getting a mortgage or personal loan. It may also dampen any remaining interest in mortgage refinancing on behalf of existing homeowners.
That said, the news isn't all bad. In fact, there is a silver lining that many Americans can take advantage of now. The interest rate hike can actually help you by increasing the money you can earn on deposit vehicles like high-yield savings accounts and certificates of deposits (CDs).
Don't have a CD or high-yield account? Don't worry. Start exploring your high-yield options here now to see how much more you could be earning.
How the Fed's interest rate hike can actually help you
Higher interest rates are generally not great news. However, they can actually be a boost to account holders with the following:
High-yield savings accounts
If interest rates are rising on mortgages and credit cards then they're also growing for high-yield savings accounts, making now a great time to open one. Average interest rates on regular savings accounts are around 0.39% annually, according to the FDIC. But rates on high-yield accounts have been more in the 3.5% to 4.5% range. And after Wednesday's rate hike, it's possible, if not likely, that those rates will jump higher. That means you're leaving money on the table by not acting now.
How much money? Using a $5,000 deposit for example, you'd only grow your bottom line to $5,019.50 if you keep your money in a regular account. Moving it to a high-yield account with a 3.5% rate, however, will move it to $5,175 — and that's at the 3.5% rate!
With the amount of options on the market currently and this week's Fed rate hike you may be able to get a rate even higher. But act now to take advantage. Interest rates on high-yield accounts are adjustable so they could drop in the future if inflation is tamed and the Fed refrains from future moves.
Explore your high-yield savings account options here to learn more.
CD accounts
With a CD, you'll have to lock your money away for a set period of time. If you deduct from it before its term has expired you'll have to pay a penalty, which may wipe out all or most of the interest you've earned. That noted, CDs are also offering exponentially higher interest rates than regular savings accounts. Those rates, too, may also rise after the recent Fed activity. So if you're willing to put even a portion of your funds into a CD, now is a great time to do so.
One way CDs are different than high-yield savings accounts is that their rate is fixed. If the rate environment changes during your term in a negative fashion (say, for example, inflation cools and rates go back down), you'll still be locked in at the higher rate you opened your account with. Conversely, if rates rise yet again, you won't be able to take advantage. If that's a real concern — but you still want to earn the interest that's currently being offered — you may want to put portions of your money into different CDs at different times (laddering) so that you can adjust to any interest rate movements.
Check out your CD account options here to see how much more you could be making.
The bottom line
If you were looking to buy a home this spring or considering refinancing your current one, the Fed's announcement this week was discouraging. But, if you have money to deposit, the rate hike could actually benefit you. By moving some money into a high-yield savings or CD account (or both) you could make the rate hike work to your advantage. Just be sure to shop around before committing to a specific bank or lending institution and check fees and balance requirements in addition to the interest rate being offered.
