The Fed’s Latest Rate Hike Just Made Your Savings Account Even More Valuable

Photo of Fed Chair Jerome Powell to accompany a story about the latest federal interest rate hike Getty Images
Federal Reserve Board Chairman Jerome Powell. At its latest Federal Open Market Committe meeting, the Fed raised interest rates for the fifth consecutive time this year.
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The Federal Reserve this week raised its target federal funds rate range to a target 3% – 3.25%, pushing interest rates higher than they’ve been since Jan. 2008.

The decision follows consecutive inflation reports showing prices are still rising, despite interest rate hikes the Fed has already enacted this year to combat inflation. 

It could be months until inflation levels come down, and the Fed may well keep raising interest rates until it does. Just last month, Fed Chair Jerome Powell warned that efforts to lower inflation would “bring some pain” in the form of potential job losses and economic slowdown. 

That means the cost of borrowing will continue going up, too. Savers will remain the one group benefiting through this process, as bank account interest rates keep rising

When it comes to how long rate hikes may last, “It’s going to all depend on what the latest inflation figures are,” says Alvin Carlos, certified financial planner and founder of District Capital Management, a virtual financial planning firm. He expects additional increases at least through the next two Fed meetings this year, in November and December. 

Other experts predict ongoing rate hikes, too: “At a minimum into the first half of next year,” says Kenneth Chavis IV, CFP, senior wealth manager at LourdMurray, a wealth management group. 

[READ MORE: ‘A Lot of Pain Ahead’: Why One Expert Predicts Many More Fed Rate Hikes Before Inflation Slows, and How You Can Prepare]

Here’s more about the latest Fed rate hike, and how your savings may be one way to mitigate the pressure:

What Does Another Fed Rate Hike Mean for You?

“This year, we’ve seen really unprecedented and rapid acceleration of interest rate rises,” Chavis says. “The fastest that’s been seen in multiple decades.” Those rapidly rising interest rates, coupled with high inflation, has experts concerned with the growing probability of economic downturn.

You may have already noticed how federal interest rate hikes can have a ripple effect across your personal finances: mortgage rates are spiking, interest is going up on your credit cards, and home equity and HELOC loans are getting more expensive. On the other side of the coin, though, savings account rates are increasing, leading to better earnings on your balances. And CD rates are growing too, making short-term CDs a lucrative choice over locking in a longer term. 

At a macro level, the Fed’s rate hikes can ultimately have a cooling effect on the broader economy, leading to poor stock performance — and more volatility in your investment accounts. Corporate layoffs due to higher borrowing costs are a concern, too — they raise the potential for higher unemployment rates, which Powell has already indicated is likely

“A lot of economists and financial experts say that even just one such month where rates rise, typically it takes six to nine months to see the impact,” Chavis says. The Fed’s first rate increase of the year was in March, and it was the first rate hike since they were dropped to near-zero in March 2020. This week marks the fifth consecutive rate hike since then, and the third increase of three-quarters of a percent.

“For the Fed to be raising rates at a near unprecedented rate, a lot of folks are saying, ‘Hey, this is undoubtedly going to send the economy into a tailspin, down into a recession.’” The depth and the magnitude of that recession, Chavis says, remains up in the air.

How You Can Prepare

There’s not a lot you can do to stop a recession, but one of the best things you can do when financial downturn hits is save money. Luckily, saving gets even more appealing when interest rates rise, since the interest you’ll earn on your balance is about to get even better. If you don’t already have a well-stocked emergency fund in a high-yield savings account, start putting away any amount you can afford today.

There are a few more actions you can take to prepare, too. 

Take stock of your expenses and figure out where you may be able to reduce your monthly costs. Think about how you may be able to increase your income, or add another income stream. Start touching up your resume or building your network if you’re worried about losing work. And if you have high-interest credit card debt, do what you can to pay it down before interest grows even higher.

“I encourage everyone just to pause and look at their overall financial situation,” Carlos says. 

Why You Should Make Sure Your Savings Are in the Right Place

Not only is your savings a key tool against potential recession, but you can get ahead by taking advantage of increasingly competitive savings account rates.

Savers will get an upside because the interest on their savings accounts will continue to go up, says Carlos. “I wouldn’t be surprised if, by the end of the year, we’re going to see rates in our bank accounts somewhere between 2.5% to 3%.”

Already, you can earn above 2% APY from the best high-yield savings accounts. Earlier this year, even the highest-earning accounts were only offering around 0.5% APY. That’s an increase of around 1.5% since this spring. As the Fed continues to move federal rates higher, you can count on your variable rate high-yield savings APY to grow as well.

This type of account can be ideal for recession prep, because it’s where experts recommend keeping your emergency fund. Not only can a high-yield savings account help you earn a bit more on your savings balance, but it’s easy to move your cash in and out, and there’s no risk of losing your principal. 

The only other thing to consider is how much you should save. In general, experts recommend keeping at least three to six months’ worth of expenses in an emergency fund, which can help you get through a period of uncertainty or cover an unexpected expense. But it’s OK if you don’t have that amount of cash on hand already. Start by contributing what you can each month, or every pay period. Every dollar counts, and you can build your savings up over time until you have an amount that makes you feel most secure.