Does the Fed rate hike mean higher interest on your savings? Maybe, but it’s worth shopping around.

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Federal Reserve officials raised the federal funds rate on Wednesday, March 16, for the first time in more than three years. The new target range is 0.25% to 0.50%, up a quarter of a percentage point from the previous range of 0% to 0.25%. Although this increase may not seem like a lot, it is still likely to have an effect.

Higher interest rates can increase costs for borrowers, but it can also mean higher returns for savers. After all, when you have a savings account at a bank, you are effectively letting the bank borrow your money, and the institution pays you interest in return.

A Fed rate hike does not instantly change the rates offered by your bank, but it may cause some accounts to increase. In a higher rate environment, banks may start raising rates on savings accounts to attract new customers. This puts competitive pressure on other institutions to increase their rates. If one bank starts, others are likely to follow.

What is the federal funds rate?

The federal funds rate, or “Fed rate,” is the interest rate that banks charge each other to borrow money overnight. According to the Federal Reserve, institutions borrow money and lend from their reserves after hours to meet regulatory requirements and be prepared to handle market conditions.

See the latest news on MarketWatch The Fed Column

The funds rate is set by the Federal Reserve and the Fed uses it to help adjust monetary policy based on economic conditions. This affects you as a consumer in various ways. For example, raising rates can help dampen inflation: a higher interest rate typically results in higher costs for a loan or credit cards, so households may be less willing to borrow money. the money. This could lead to less spending, which could lead to lower prices and less inflation.

Read: Millennials and Generation X: Here’s why you have such a hard time saving for your retirement

Benefit by choosing a high-yield account

Whenever there’s a Fed rate hike, it’s a good idea to check the interest rate on your savings accounts and shop around for a better option. Not all banks will follow the others in raising their rates. Some consistently offer a low annual percentage yield of around 0.01%, and the current national average rate for savings accounts is just 0.06% APY, according to the Federal Deposit Insurance Corp.

But online savings accounts tend to offer better rates – several times higher than average – because the institutions that offer these accounts don’t have to operate expensive branches and can pass the savings on to customers under the form of higher rates and low (or zero) rates. ) costs.

A higher APY can make a visible contribution to your bank balance. Say you have $10,000 in a savings account that pays a low APY of 0.01%, which is typical for big banks. After a year, that balance would earn only about a dollar in interest. But put that amount in a high-yield savings account that earns an APY of 0.50%, and it would earn about $50 after a year. This interest would also earn interest over time, a feature known as compound interest. High-yield savings accounts might not make you rich, but you’ll automatically earn a lot more than you would with a lower rate option.

Use a savings calculator to figure out what your bank balance might be with different APYs and see how your money might grow.

With low rates, why put money in a savings account?

Inflation erodes purchasing power because it means that goods and services are more expensive than they were before. So when the rate of inflation is significantly higher than the average rate in the national savings account – as it has been since late last year – it may seem that putting money in a savings account is not advantageous.

Learn more: The Fed Got Inflation Wrong – And Now It Admits There’s No Quick Fix

But the main reason to save money is to have easy access to cash in case you need it quickly, for example, for an unexpected car repair expense. Setting aside funds for financial emergencies can help you avoid getting into debt, which can be costly, especially when interest rates rise.

Having at least three to six months of spending in an emergency savings fund is ideal, but anything you can put aside would help. And making that money earn interest is one more way to make your money work for you.

If you have a fully funded emergency savings account and have extra cash that you don’t need to access immediately, it may be worth considering other short-term options to grow your savings. money. Some inflation-linked savings bonds, for example, can generate a better return than even the best savings rates. But you will have to leave the money parked in the account for a predetermined period of time – a year or more, for example. For longer-term goals, like retirement, it makes sense to consider investing.

Also see: Mortgage rates soar above 4% for the first time since 2019

The federal funds rate deserves some attention. As rates rise, loans are generally more expensive, but savings accounts can generate higher returns. For those with little or no debt and who can contribute savings, a Fed rate hike could be a financial opportunity.

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Margarette Burnette writes for NerdWallet. Email: [email protected] Twitter: @Margarette.

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