Following a brief pause, the Federal Reserve just implemented its 11th rate hike since early last year. At today’s Federal Open Market Committee meeting, the federal funds benchmark rate went up by 25 basis points, bringing the new range to 5.25% to 5.50%, the highest level in over two decades.
Though inflation is showing signs of cooling, with the year-over-year rate dropping from 4% in May to 3% in June, it’s still above the Fed’s 2% target goal, which means prices haven’t fallen enough. Last month, Fed Chair Jerome Powell made it clear that while there’s been progress, more rate hikes this year were likely in order to battle inflationary pressures. “Nearly all Committee participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year,” he said in the press conference.
In the lead-up to this month’s Fed meeting, most experts predicted another rate hike, though a few expected the central bank might hold rates steady. Under pressure to both keep inflation in check and maintain economic growth, the Fed is tasked with striking the right balance. “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.”
Rising prices and the monetary policy of the Fed have 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 finances.
Is this the end of the Fed’s rate hikes?
Since the Fed started its rate hikes in 2022, inflation has been inching downward slowly but surely — last June it was at a record high of 9.1% compared to this June’s 3%, according to the latest consumer price index report.
But there’s no way to predict right now whether the Fed will pause rate hikes in September or hike rates once again. August’s inflation data, as well as unemployment numbers, will likely play a significant role in influencing the Fed’s next move. 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.
Even if inflation continues trending down, experts warn we’re not out of the woods yet. A recession — albeit likely a milder one — is still a possibility, which makes now a good time to build up an emergency fund in a high-yield savings account and pay down debt.
Savings accounts will remain at an all-time high, experts say
Ahead of the Fed’s move, some banks have increased interest rates for high-yield savings accounts within the past week. There’s a chance that banks could push rates even higher to remain competitive for deposit accounts — but not by much.
Regardless of what happens next to savings rates, they’re currently at a record high, with some of the most competitive accounts earning over 4.00% and 5.00% APY. Now is a good time to set aside money, if you can, while you can still earn a solid return on it. Whether inflation persists or the economy slows, your savings could prove vital as a cushion to ride out the next economic wave. Plus, the interest you earn can offer a nice benefit to the money you’re already saving.
It’s time to lock in a long-term CD
“From a consumer standpoint, even if the Fed stops raising rates, it remains a great moment for savers,” said John Blizzard, president and CEO of Seattle Bank, last month. For many banks, CD rates are the highest they’ve been in more than 15 years, he added.
Rates for certificates of deposit, or CDs, are experiencing an inverted yield curve, experts say. Normally, long-term CDs, like three- or five-year CDs, have higher APYs than shorter-term CDs, like six-month and one-year CDs. But right now short-term CDs have higher APYs than longer terms, meaning you earn higher returns on the money you plan to set aside for shorter periods.
“History tells us that when this happens, it generally means that the longer-term economic outlook is more questionable,” said Blizzard.
Most banks aren’t raising rates for long-term CDs, and many experts believe they’ve reached a peak high and won’t change much over the next few months. So if you’re considering a long-term CD for your savings, now’s the time to compare rates. Experts suggest locking them in now before rates drop, otherwise you may miss out on a better return.
Borrowing will continue to be expensive
Usually, when the Fed increases rates, borrowing becomes more expensive for personal loans, home equity loans or credit card debt. Annual percentage rates will likely remain high, which means your debt can continue to grow if you aren’t actively working on a strategy to pay it down.
As credit card and loan annual percentage rates rose during the past 15 months, many lenders have tightened requirements, making it harder to get approved for a new credit account. “[The Fed’s] decision will likely continue to reduce availability of credit,” said Chelsea Ransom-Cooper, financial planning director at Zenith Wealth Partners. If the Fed continues raising rates, rather than lowering them as the market expected, credit conditions will tighten even more, making it harder and more expensive to access credit, she added.
A debt consolidation loan can help consolidate high-interest debt into a lower, fixed-rate loan, while a balance transfer card can offer a respite from interest for a period of time.
More importantly, if you’re taking on new debt, plan to pay more than the minimum each month to kick down some of the interest that can accrue. Compare lenders to get the best rate possible. If you’re looking for a new credit card, make sure not to spend beyond your budget and to pay your bill in full each month to avoid high-interest charges altogether. And if you’re one of the millions of people with federal student loan debt preparing for repayment in September, focus on paying off other debts or boosting your savings with a high-yield savings account to get yourself ready for repayment.
Regardless of what the Fed does next, now’s the time to closely examine your finances. For now, experts are urging consumers to beef up their emergency savings and tackle any high-interest debt. There’s still time to take advantage of the high savings rates, but since the cost of borrowing will also remain high, work to pay down any outstanding balances as soon as possible.
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