If you’re considering opening a new savings account or certificate of deposit (CD), it’s essential to know how the Fed’s decisions affect your interest income over time to make an informed decision about where you want to invest your money.
The Federal Open Market Committee (FOMC) held its last meeting on June 11 and 12. During this time, committee members debated whether to increase, maintain, or decrease the Fed Funds rate. And in the end, they decided to keep their target rate as it is now. The next meeting will be July 30-31, 2024, when committee members will again consider whether it is time to change the federal funds rate.
These interest rate decisions are key indicators of the health of the economy and ultimately trickle down to deposit accounts. Here’s a closer look at how you can take advantage of current CD and savings rates in light of the Fed’s policy decisions.
The Federal Funds Rate, Explained
The Federal Funds Rate is the target interest rate set by the Federal Reserve. It determines the rate that banks charge each other to borrow money overnight to meet reserve requirements.
The federal funds rate is expressed as a range that is currently 5.25–5.50%. Within that range, banks negotiate a certain rate with each other.
The Fed uses the funds rate as a tool to curb inflation. When inflation is high, the Fed raises its target interest rate to make borrowing money more expensive, which discourages consumer spending and helps lower everyday costs. When the economy needs a boost, the Fed could initiate a series of rate cuts to encourage more spending and borrowing.
How the Federal Funds Rate Affects Your Deposit Accounts
Changes in the Federal Funds Rate have major consequences for financial institutions and the economy as a whole. But these decisions also impact your bottom line.
Although the Fed’s interest rate does not directly affect the interest rates set by individual banks on consumer deposits and loans, they are closely correlated. For example, when the Fed raises rates, interest rates on deposit products such as high-yield savings accounts and CDs also tend to rise. And when interest rates are cut, deposit rates generally fall.
Read more: What the Fed’s interest rate decision means for bank accounts, CDs, loans and credit cards
Should you open a new account before the next Fed meeting?
The Fed will meet again on July 30 and 31 and decide whether or not to adjust the federal funds rate. (At its last meeting, the committee kept the target range for the federal funds rate at 5.25-5.50%.) Previously, the funds rate rose by a fraction of a percent after each meeting.
With inflation slowing and the economy improving, many are wondering if the Fed will finally start cutting rates next month. Prior to the last meeting in June, the committee released the following statement:
“In considering any adjustments to the target range for the Federal Funds Rate, the Committee will carefully assess the incoming data, the evolving outlook, and the balance of risks. The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 percent.”
In other words, the Fed is expected to keep its target rate steady until inflation cools further. This means that there will probably be no major interest rate movements for the time being.
That said, we can’t know for sure what will happen in the future. So while you wait for the Fed’s July announcement on how interest rates will change (or not), it may be a good time to evaluate your current savings account or consider opening a new account.
If the Fed decides to leave interest rates unchanged, it will not have a direct impact on your savings and CD rates. This means that now is the best time to open an account and take advantage of historically high interest rates. As it stands now, the best savings and CD accounts pay around 4% to 5% APY and higher.
However, if the Fed decides to cut rates, this may be your last chance to lock in today’s competitive interest rates with a CD.
Ultimately, waiting until the Fed’s next announcement before opening a new deposit account won’t have a significant impact on your potential earnings. This is a good time to compare current rates on your existing accounts and see if you can earn more elsewhere.
For example, say your existing savings account earns 0.45%, the national average for traditional savings accounts. If you deposit €10,000, you will earn a total of €45 in interest.
However, some of the best high-yield savings accounts offer around 5%. If you deposit $10,000 at that rate, you will earn $500 in interest over a year. That means you could be missing out on significant earning potential by leaving your money in a low-interest account.
Regardless of how the Fed adjusts the federal funds rate, it pays to reevaluate your checking accounts and make sure you’re earning the best interest rate possible.
Read more: This is how you choose the right high-yield savings account for you
