What the Fed’s Latest Hike Could Mean for Savers and Borrowers

What the Fed’s Latest Hike Could Mean for Savers and Borrowers

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But will they go higher still? This is certainly possible — and even likely among a certain subset of Banks and credit unions that preferred to wait for today’s Fed hike itself to be a done deal before increasing rates — but likely too that some are already there, having made their increases confident in Fed rate expectations, given how foregone that decision has seemed.

Anyway, the moment any market scent suggests that the Fed’s rate-hiking campaign has run its course or even points toward a plateau in rates or worse, a rate cut somewhere on the near horizon, then rates paid on deposits will fade to black. And if the money you have on deposit is in a savings or money market account which can adjust rates any time it wants to, you’ll get beat up in the rate while-you-were-sleeping department.

On the other hand, if you can afford to put money in a CD for several months or years and lock in today’s stellar rates, you can be assured that return for the full term of the certificate. That way you’ll prolong your right to earn these record yields even after the Federal Reserve moves its own dial into neutral or reverse.

Warning

Unless you have an index fund that invests in investment-grade CDs, it’s very tempting to watch for a quarter percentage point or an extra 10 days at a high return over the top CD. But rates move, and if the rate is high enough because the institution has met its deposit goals, then that CD might be able to be sold and taken down even before its maturity. Use our Best CD Rates ads to get the best CD period, and be happy with that rather than wringing your hands over a peak.

What About the Impact on Borrowing Rates?

Higher Federal Reserve hikes are often the saver’s best friend and the borrower’s worst nightmare. Last night’s variable credit-rate, such as might come on a credit card, is almost always directly tied to changes in the federal funds rate, and when the Fed hikes rates, any balance you owe could get more burdensome to pay off.

Personal loan rates can also increase as a result of Fed rate hikes. If you currently have a loan and it’s fixed-rate, the Fed hike won’t affect your payments. But anyone shopping for a new personal loan this year could find that rates have gone up.

Rates on auto loans can be affected by Fed policy as well, though the tie between the federal funds rate and what individual auto lenders charge on new loans isn’t as direct as it is for short-term and variable-rate debt.

Important

It’s true that another Fed hike will make those consumer debts more expensive. But before today’s rise, the federal funds rate had moved up by 4.75 percentage points. So the likely marginal effect of today’s hike was rather modest.

What about mortgage rates? Well, yes, those would be affected, of course – but only on new or refinanced loans, or on existing adjustable rate loans, not on any existing, fixed-rate mortgage.

But Fed rate increases do not necessarily send mortgage rates sailing higher. For better or worse, the behaviour of mortgage rates is much more likely tied to 10-year Treasury notes (whose direction is driven by flows in the bond market) and, of course, inflation, the pace of job creation and economic growth.

Still, Tom Graff, head of investments at Facet Wealth, said he believes there’s a lot more space between the 10-year Treasury rate and mortgage rates today than there would be in a normal market cycle, spurred by a lot of three-to-four-day swings in the federal funds rate. ‘I think we could really be in a place where that volatility begins to abate a little bit, and so there’s probably is a little bit of downside to mortgage rates,’ he said.

Will the Fed Raise Rates Again?

You never really know what the Fed will do at its next meeting – six weeks away. But today’s Fed announcement did omit words it used after the meeting last month to signal that the committee’s work wasn’t done, and that slightly larger increases might yet come in 2023.

This time, however, it came with no Limbo-line statement about standing ready to hike again if the data warrant it, a commitment it has made after literally every hike in the past. The hikes have come slowly, laboratory-style, with the Fed saying it would wait and see what the next round of data will bring, and hold judgement on future ‘episodes’ until its next meeting on 13-14 June. As I write, approximately one third of futures traders think the US central bank may try for another hike this year.

Rate Collection Methodology Disclosure

One of Investopedia’s daily responsibilities is to use rate data from more than 200 banks and credit unions that pay CDs and savings accounts to consumers across the country to determine which accounts are paying the most every day. To make our lists, the offering institution must be protected by the Federal Deposit Insurance Corp. (FDIC for banks, NCUA for credit unions) and its initial deposit must be below $25,000.

Banks must be nationally available The best checking account also allow free withdrawals at ATMs. We exclude credit unions that serve members who either donate to a charity or association to join but do allow people who don’t live in a certain area or work in a certain kind of job. However, we won’t consider as a best credit union those that require a donation of $40 or more. Learn more about how we researched and selected the best rates by reading our full methodology.