Only instructional reasons are intended to be served by the material about investing on this website. We do not provide brokerage or advisory services nor encourage or advise clients to purchase or sell certain stocks, securities, or other assets. We offer neither of these services. On December 14, 2018, policymakers from the Federal Reserve hiked the federal funds rate for the seventh time this year. The rate went up by fifty-five hundredth of a percentage point. This is a considerably lesser rise than in recent times; each of the previous four increases was equal to three-quarters of a percentage point.
There is still a possibility that it will have an impact. A rise in interest rates may result in increased expenses for those seeking loans, but it may also result in increased returns for those who choose to keep their money. After all, if you keep your savings in a bank account, you are giving the bank permission to borrow your money. In exchange, the financial organization will give you interest on your account.
An increase in Fed rate does not immediately result in a change in the rates offered by your bank; nevertheless, it may increase certain accounts. When interest rates are higher overall, financial institutions may begin to offer greater interest rates on savings accounts to bring in new clients. This puts other financial institutions under pressure from the market to increase their interest rates. If one bank takes the initiative, others will probably follow suit.
What Is The Federal Funds Rate?
The federal funds rate is the interest rate at which commercial banks lend money to one another overnight. After business hours, banks borrow and lend from their reserves to meet regulatory requirements and be ready to respond to market conditions, as reported by the Federal Reserve.
The Federal Open Market Committee, which the Federal Reserve utilizes to assist in adjusting monetary policy depending on the state of the economy, is responsible for determining the fund's rate. As a customer, you are impacted in a variety of ways by it. For instance, increasing interest rates may contribute to the reduction of inflation: A higher interest rate will often result in greater charges for a loan or credit card, which may result in families being less inclined to borrow money. This may result in fewer people spending money, which leads to lower prices and reduced inflation.
Take Advantage of the Situation by Selecting an Account with a High Yield
When the Federal Reserve decides to raise interest rates, it is always a good idea to check the interest rate on your savings accounts and do some comparison shopping to see if a better choice is available. There is no guarantee that all financial institutions will raise their rates simultaneously. The Federal Deposit Insurance Corporation reports that the average annual percentage yield (APY) for savings accounts throughout the rate as of November 2022 is 0.24%. However, certain savings accounts routinely give a low annual percentage return of about 0.01%.
A larger annual percentage yield might significantly boost your overall financial standing. Let's say you have $10,000 in your savings account at a big bank, which typically produces an annual percentage yield (APY) of just 0.01%. After one year, the interest earned on that debt would amount to just around one dollar.
However, if you invested the same sum in a high-yield savings account that earned a 3% annual percentage yield (APY), it would have more than $300 in additional earnings after a year. Compound interest describes the situation in which the initial interest earns additional interest as time passes. You won't become wealthy by using high-yield savings accounts, but your earnings will be much more than they would be if you chose a lower-rate alternative.
Why Would You Put Money Into Savings When Inflation Is So High?
Spending power is reduced when there is inflation since it means that the prices of goods and services are higher than they were in the past. Because of this, storing money in a savings account is counterproductive when the inflation rate is much greater than the average national savings account rate, as it has been since 2021. This situation has existed since 2021.
On the other hand, the most important reason to put money aside is so that you will have it readily available if you have an unexpected expenditure that requires you to pay for car repairs, for example. Putting money aside for unexpected costs will help you avoid getting into debt, which can be quite expensive, particularly if the interest rates are high.
