The Fed Just Hiked Interest Rates Again. Experts Say Now Is the Time to Make Sure Your Savings Are In the Right Place

U.S. Fed Chair Jerome Powell speaks following the Fed's decision to raise interest rates, July 27, 2022. Drew Angerer/Getty Images
U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC), July 27, 2022 in Washington, DC. The Fed raised interest rates by three quarters of a percentage point in its fourth rate hike this year.
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Sept. 21, 2022: The Fed just raised interest rates again, by another three-quarter percent. See our most recent update for the latest on the Federal Reserve, interest rates and your savings.

The Federal Reserve just increased its target federal funds rate to 2.25-2.50%. As rate hikes continue experts say now is the time to make sure your money is in the right place to reach your savings goals — especially amid inflationary pressure and growing uncertainty.

This week’s increase marks the fourth interest rate increase this year, as the Fed works to temper runaway inflation rates, and a three-quarter percent jump from last month’s interest rate hike. Coming from pandemic-era lows near zero, the Fed’s latest decision makes for a total 2.25% increase since the start of this year

And there are likely higher rates to come — in a statement, the Fed indicated it “anticipates ongoing increases in the target range will be appropriate” to achieve its goals of lower inflation and maximum employment.

As higher interest rates are making mortgages, credit card payments, and loan debt more expensive for homebuyers and borrowers, they’re also driving up earnings for savers. Right now, the best high yield savings account rates are approaching 2% APY and the best certificates of deposit earn upwards of 3% APY. 

Here’s what else you need to know about this week’s interest rate hike, and why experts say now is the time to choose a bank that can best help you reach your financial goals:

How Will Higher Federal Interest Rates Affect Your Savings?

When the Federal Reserve changes its target federal funds rate, the interest rates that banks charge borrowers and pay on deposits tend to follow. 

The target federal funds rate affects interest rate markets, the Fed’s plan for targeting inflation, and market expectations for both interest rates and inflation, says Amy Rosenow, CFA, CFP and founder of Fearless Financial. 

The change isn’t immediate, though — especially for savings. “Fed rate increases will typically correlate with bank APY increases very quickly in terms of increased rates for borrowing, and eventually, but typically more slowly, for rates on consumer savings,” Rosenow says.

You may have noticed your savings account APY steadily rising over the past few months, not just in short bursts when the Fed raises rates. Similarly, it’s unlikely you’ll see a full percentage increase in direct response to this rate hike. Still, you can expect rates on your savings accounts, CDs, and money market accounts to keep rising, at least as long as federal rates continue to climb.

“As long as the Fed raises interest rates we can expect bank account APYs to continue to increase and become more attractive to savers,” says Jose Sanchez, CFP, a financial planner based in New Mexico.  

Why Choosing the Right Bank Is Important

If you’re looking for the best return on your savings, make sure you research the best place for your money. 

“Where you have your money is going to be very important [over] the next couple of years,” Greg McBride, CFA, chief financial analyst at Bankrate told NextAdvisor earlier this year. Like NextAdvisor, Bankrate is owned by Red Ventures.

Rosenow agrees — she advises clients to closely monitor savings rates to find the best fit for their goals, since some banks offer more competitive rates than others. 

“This year I’ve noticed that the predominantly online savings banks have raised their rates and are now earning over 1.2%. Even the money market rates at brokerage firms like Fidelity and Schwab have become more competitive.” Meanwhile, larger national banks have been “stingy” with their savings rate increases, she says.

Those large, brick-and-mortar chains are more likely to offer traditional savings accounts with very low interest — sometimes as low as 0.01%, even in today’s rising rate environment. For the best interest rates, look for online banks or credit unions with high yield savings account options. These banks have fewer overhead costs, and are more competitive, resulting in higher APYs for customers.

While the national average savings interest rate — which includes non-high yield, traditional savings account options — is still just 0.10% APY, there are plenty of accounts that earn more than 10x that amount.

Over the past several months, for example, Ally Bank has raised its savings account interest rate from around 0.50% to 1.25% APY. Synchrony Bank, too, is one of the highest savings account options today with a 1.65% APY, up from 0.50% in March. 

Pro Tip

Compare the highest interest rates available today among our top picks for high-yield savings accounts, certificates of deposit, and money market accounts.

Why You Should Save in a Rising Rate Environment

Inflation is one of the biggest challenges facing American consumers today, and the Federal Reserve’s interest rate hikes are designed to slow the runaway inflation rate. 

The latest consumer price index — which the government uses to track trends in the cost of gas, food, and more — showed an increase of 9.1% in the cost of goods and services over the past 12 months. But even savings rates upwards of 2% or 3% APY won’t help protect your buying power against inflation levels of 9% or more. 

It’s always important to maintain a strong emergency fund — worth at least three to six months of expenses — and to save for short-term goals, like a down payment or going back to school. 

Even a much smaller amount of emergency savings can make a big difference if emergencies occur, says Michele Raneri, vice president of financial services research and consulting at TransUnion.

Every little bit counts, Rosenow agrees. “Better to put away just a few dollars than none at all. Progress beats perfection.” 

Keep Investing for Maximum Long-Term Returns 

But for longer-term goals, remember that you’ll get a better return from an investment fund like your 401(k), a Roth IRA, or general brokerage account that holds index or mutual funds. 

“The majority of Americans can benefit from additional savings, whether that is looking at Series I Savings Bnds, or better interest rates for your emergency fund, or buying the stock market after it has sold off —  if you can find a way to do it now is a great time,” Rosenow says.

Regardless of current market conditions, you should always have a plan, Sanchez says. You can rebalance your portfolio as your goals change, but having a plan for your money can help you prepare to weather interest rate and market fluctuations as they come.

“From the long-term perspective, consistency is the key to investing over a horizon of many years,” Raneri says. “A long-term financial strategy is to keep saving and investing, even during down markets.”