The Fed’s Interest Rate Hikes Continue: Here’s What That Means for Your Savings Account

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Fear not — it’s good news for savers. 

Inflation has been raging since mid-2021, and it’s caused a world of stress for a lot of people. In fact, U.S. credit card balances grew to $930 billion in late 2022, according to recent data from TransUnion, and it’s fair to assume that inflation played a role in that.

The Federal Reserve, meanwhile, has been on a mission to slow the pace of inflation. To that end, it implemented a series of aggressive interest rate hikes in 2022.

Meanwhile, the Fed met today to finalize its interest rate policies for early 2023. And while it’s only moving forward with a modest rate hike this month, that could be enough to result in higher interest rates for savings accounts and CDs alike.

A modest but meaningful rate hike

The Fed just announced it will be moving forward with a 0.25% interest rate hike. That’s the lowest rate hike we’ve seen since March 2022.

In fact, the Fed raised interest rates seven times in 2022, and four of those rate hikes amounted to a 0.75% — a far more aggressive target than usual. Of course, the Fed had its reasons. It needed to make a serious dent in inflation to give struggling consumers relief. But those aggressive rate hikes have driven up the cost of borrowing, to the point where once-affordable options like home equity and personal loans may be less attractive these days.

To be clear, the Fed is not in charge of setting consumer borrowing rates. But when it raises its federal funds rate, which is what banks charge one another for short-term borrowing, it tends to indirectly drive up the cost of consumer borrowing across the board.

But while rate hikes aren’t a great thing for borrowers, they can be a good thing for savers. That’s because rate hikes tend to lead to higher interest rates in savings accounts, as well as higher CD rates. And so following the latest Fed announcement, those with money in the bank could see their savings accounts’ interest rates rise even more.

Furthermore, if you’re thinking about opening a CD, early 2023 may be a good time to do it. You may find that you’re able to snag a generous interest rate without having to tie up your money for more than 12 months at a time.

Will the Fed keep raising interest rates in 2023?

The fact that the Fed’s latest interest rate hike wasn’t so aggressive is a sign the central bank is pleased with the progress that’s been made in the course of fighting inflation. But there’s still work to be done there.

Although inflation has cooled a bit since mid-2022, living costs are still considerably higher today than they were at this time two years ago. And so until inflation levels come down quite a bit, the Fed will most likely continue to raise interest rates. However, unless inflation reverses course, we’re unlikely to see the aggressive 0.75% rate hikes we did in 2022.

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