What the Fed’s 0.75% Rate Hike Means for Your Money, and Why Now Is a Great Time to Save

Photo to accompany a story about most recent Fed rate hike
Fed Chairman Jerome Powell speaks at a past Federal Open Market Committee Meeting news conference. Today, the Fed announced its decision to raise interest rates for the sixth time this year.
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The Federal Reserve this week raised the target federal funds rate to 3.75% – 4%. 

That’s the sixth consecutive rate hike this year, pushing rates higher than they’ve been since December 2007

“[Fed Chairman] Jerome Powell is sticking to exactly what he said he’s going to do,” says Cory Moore, certified financial planner and founder of Moore Financial Planning, referring to the Fed’s plan to raise rates in its pursuit of maximum employment and a 2% inflation rate.

However, the last Consumer Price Index showed inflation still up by 8.2% annually, and today’s announcement following the Fed meeting referenced the lag between monetary policy and real-life economic effects.

Inflated prices combined with rising interest rates have borrowers paying the price with loans, credit card debt, mortgages, and more. But there’s a silver lining for savers. As the Fed continues raising rates, savings account interest rates get better. 

Here’s everything to know about the Fed’s latest move and how you can benefit from the right savings account today: 

Read More: How High Will Savings Account Rates Go This Year? We Did the Math And Asked the Experts

How Federal Rate Hikes Affect Your Money

This week’s Fed decision marks the sixth consecutive rate hike and the fourth increase of 75 basis points this year. It may not be the last, either: if inflation remains a significant concern, experts predict another rate hike when the Fed meets again in December. 

“Their main goal is to be aggressive on fighting inflation,” says Shannon Grey, certified financial planner and founder of InvestEdge Planning, a financial planning firm in San Diego, California. “They want to tame it before it gets out of control.”

For new and current homeowners, that means mortgage rates and home equity and HELOC loan rates will keep going up. People with revolving debt from credit cards, and new loan borrowers, will pay more on their balances. And with rising prices ahead of the holidays on everything from travel to food and gifts, charging more than you can afford can be even riskier.

What’s more, ongoing market volatility may have investors feeling uncertain or stressed about how their portfolios are performing, says Grey. You’ll likely see fluctuating fuel prices, stock earnings, and steep monthly payments on a new mortgage.

What the Fed Rate Hike Means for Your Savings 

If there’s one positive consequence of the Fed’s aggressive rate hikes, it’s your savings.

Based on the high-yield savings and CD rates we track weekly, rates are consistently trending upward. While these rates aren’t directly correlated with the Fed rate hikes, they tend to move in the same direction. 

“This is a great place to be for high-yield savings and CDs. They’re pretty attractive, especially in this current market environment,” says Grey.

Long-term savings, like retirement, can withstand volatility, will still perform better in riskier market investments. But for short-term savings or money you need for emergencies, high-yield savings rates are a great resource right now. Savings rates could reach close to 3.75% – 4% by the end of the year because the Fed is prioritizing fighting inflation, she adds. 

Earlier this year, savings rates were averaging at 0.5% APY at best. But our insights show that the average savings rate currently sits at 2.73%. That’s already more than a 2% increase in less than a year, with potentially more to come.

Here’s a breakdown of how much that difference in interest can make for your savings balance. Say, for example, you have a starting balance of $1,000 and you plan to contribute $100 each month to your savings. The table below shows how much you’d earn in interest (both with and without these contributions) over the course of one year, given three different APYs: 0.50%, 2.73%, and 4.00%.

0.50% APY2.73% APY4.00% APY
Starting Balance$1,000$1,000$1,000
Monthly Contributions$100$100$100
Balance After One Year$2,208$2,242$2,262

How to Prepare for Uncertainty

Despite all the recent talk of recession, Powell hesitated to take a strong stance following the rate hike announcement: “No one knows if there’s going to be a recession or not and, if so, how bad that recession would be. Our job is to restore price stability so that we can have a strong labor market that benefits all over time.”

Even if we’re not yet officially in a recession, economists and financial experts are growing increasingly concerned about financial downturn ahead. Broad economic policy may be out of your individual control, but there are ways you can prepare now to minimize the pain. 

If you don’t have savings set aside already, now’s a good time to start.

“Take an inventory of your debts and pay off any variable interest debt or high-interest debt immediately,” says Denise Downey, a certified financial planner and founder of Financial Trex, a financial planning firm. “Then it’s time to focus on making sure that you get your savings up, get your emergency fund in place, just to protect against any potential increased costs or decreased income.”

Experts recommend keeping three to six months’ worth of expenses in a high-yield savings account as an emergency fund in case of unexpected expenses or income loss. But that doesn’t mean you need to save thousands of dollars at once. Start by saving what you can. Set up automatic recurring transfers in small amounts each month. Consider increasing your income with a side hustle or cutting down your budget to set aside more money. 

“Take a look at how much you are saving, how much you are spending, and get a good handle on your expenses,” says Downey.

You can use the money saved to shore up your emergency fund, pay off any revolving debt (like credit card balances) with rising interest rates, and maintain contributions to long-term savings or investments.