The Federal Reserve on Wednesday made official what many economists and experts had already predicted:. The increase is the 10th consecutive hike dating back to March 2022.
"The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation," the Fed said in a press release announcing the increase. "The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks."
What does that rate look like in practice? When looked at through the prism of dollars and cents, each 0.25 percentage-point increase in the benchmark rate equates to an extra $25 annually in interest on $10,000 worth of debt. So, prospective homebuyers or owners looking to refinance their existing loan can expect to pay considerably more than they would have twelve months ago.
That said, the interest rate hike news isn't all bad. As those who have opened aor recently know, interest rate hikes are a boon for these types of deposit vehicles. At the same time, those with regular savings accounts may want to strongly consider .
What the Fed's interest rate hike means for savings accounts
In short: Wednesday's interest rate hike may be bad news for some sectors of the economy but it will likely only increase the appeal of high-yield savings accounts.
To understand how much more beneficial a high-yield account is versus a regular one, just look at the interest rates. Rates on regular accounts are around 0.39%, according to the FDIC. But the APY on high-yield accounts — before today's news — have been in the 3.5% to 4.5% range or even higher. That is likely to increase even further now.
"Switching soon to a high-yield savings account could be a good idea as Fed rates rise," Holley Cary, a CFP and VP, senior financial planner at First Horizon Advisors, a wealth management company, recently told. "These interest rate increases, although [probably] smaller than most of the 2022 increases, will likely see accounts boosting their APY," Cary said.
Using a $5,000 deposit as an example, a regular savings account earning the average APY would only grow to $5,019.50 after one year. But the same amount in a high-yield account with a 3.5% rate will have jumped to $5,175.00 during the same time period. And that's at the 3.5% rate! Chances are good that you can get a rate even higher now that interest rates have been boosted again.
Other benefits to know
A high-yield savings account isn't just advantageous for its interest rate. Here are two other benefits to know:
- They're easy to operate: . So all of the flexibility you're used to having with a regular savings account — deposits, withdrawals, cash access, debit cards, etc. — are the same. The difference? You'll be earning exponentially more interest alongside your normal banking activities.
- There's no risk: In there aren't many no-risk money moves you can make. But putting your money into a high-yield savings account is one of them. You won't lose any of the money you deposit (unless, of course, you make withdrawals). Interest rates are adjustable so there is the potential that you may earn less money in the future, but considering Wednesday's news, that's unlikely to be anytime soon. And even when that day does come, your principle balance will still be healthier than it would otherwise be if left in a regular account.
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