How the Fed's next move could affect your savings account rate
After 10 consecutive interest rate hikes over the past several months, the Federal Reserve will meet again this week to decide on where interest rates will go next.
For the first time since it began increasing rates in early 2022, the Fed could be ready to pause — at least temporarily. Fed Chair Jerome Powell has reiterated in the weeks since the Fed's last decision that the committee would make future rate changes on a "meeting by meeting" basis, "based on the totality of the incoming data."
Throughout the ongoing rate hikes so far, which increased interest rates from near zero to more than 5%, one group has benefited: savers. Today, savers can earn upwards of 4% to 4.5% on their balances with high-yield savings accounts.
But with only days before the Fed's next decision, what could savers have in store? Here's how savings rates could be affected whether rates go up again or stay the same.
Start maximizing your balance with the best savings rates right now.
How the Fed's next move could affect savings account rates
Savings account rates are indirectly linked to the target federal funds rate range set by the Fed. These accounts' variable interest rates can move up or down depending on how federal interest rates move. Here's what could happen with your savings rate after this week's Fed decision.
If there's a rate pause
The Fed began raising rates in early 2022 as a way to fight runaway inflation, and recent data has shown inflation starting to cool at the same time as concerns grow over an impending recession.
This, combined with statements from Fed officials, has increased the likelihood of a rate pause, or "skip" in June, giving the effects of rate hikes so far to more time to fully play out. But that doesn't necessarily mean savers should worry. A pause in rate hikes doesn't mean your savings account rate will go lower. In fact, if the Fed funds rate range remains above 5%, you'll likely continue to see today's high rates on savings accounts.
Over the longer term, however, the Fed signaling that it could be done with rate hikes — or even preparing to lower interest rates — could mean eventual lower rates for savers. "Rates will likely come down over the next 12 months and could go lower if the Fed pauses or starts to signal that they might actually be done raising," says Rick Valenzi, CFP, founder of Financial Zen.
In the meantime, you can make the most of today's high savings account rates for as long as possible. Start by comparing the best rates available today to boost your savings now.
If there's another rate hike
Despite positive signs in recent months, inflation is still well above the Fed's 2% target. And overall signals from Fed officials have been mixed in recent weeks, leaving the door open for another potential rate hike.
If there is another interest rate hike — or if the Fed skips a rate hike this month before raising rates again in July — it could mean slightly higher rates for savers, again.
"We are most likely nearing the peak of rates on savings accounts," Gregory Crofton, CFP, founder of Adap Tax Financial. "If the Federal Reserve increases rates further, expect that savings rates will increase in kind, so might peak at about 5%."
Today, only a select few savings accounts earn close to 5% APY, with many of the top high-yield savings accounts offering between 4% and 4.5% APY.
Still, it's important to remember these rates won't last forever. By taking advantage sooner rather than later, you can make the most of high yields while you can and increase your balance before rates move down again.
The bottom line
The Fed's next rate decision may still be up in the air, but there's one way you're guaranteed to benefit. Start saving in a high-yield savings account today to boost your savings balance and set yourself up to benefit from high rates as long as possible.
You can make sure you have a fully stocked emergency fund and begin saving for other short-term goals using your high-yield savings account by increasing your contributions and keeping an eye on your budget. "Whether rates are paused or increased, savers should stay the course on saving and investing," says Eric Laub, CFP, founder of Finance 180.
Find out how you can earn more with today's best savings account rates now.
