If you’re following the recent news from the Federal Reserve, you probably have a pressing question: What does the Fed rate hike mean for your savings? With the target federal funds rate increased by a quarter of a percentage point, there are definitely changes on the horizon. Many consumers are likely concerned about what these changes mean for their personal finances. With that in mind, let’s take a closer look at what the newly raised interest rates will bring.
What Does the Fed Rate Hike Mean for Your Savings?
To address this question, we first need to understand what has happened. In short, the Federal Open Market Committee (FOMC) has voted to approve the year’s first interest rate hike. That means that the rate banks charge each other for borrowing and lending is going to increase. These types of policies start at the top with the central bank. From there, they flow downward to commercial banking institutions like where you do your banking.
When it comes to savings, the Federal Reserve does not influence deposit rates directly.
However, as CNBC notes, deposit rates are “correlated to changes in the target federal funds rate.” With the federal funds rate at near-zero levels, many banks have kept their savings account rates at very low levels. The national average is reported to be 0.06%. With interest rates increasing, that number can be expected to rise as well. This should in theory mean that individuals see higher returns on their savings.
It’s Different Online
There are other factors to consider with savings accounts, though.
For example, many digital savings accounts comes with a higher interest rate than their brick-and-mortar peers. This is often due to decreases in overhead expenses that come from operating digitally. According to DepositAccounts, a $10,000 deposit in a standard savings accounts will yield an interest rate of 0.06%, leading the saver to collect $6 in interest. Compare that to the 0.46% offered on a digital account, yielding the saver $46 per year. CNBC says that this difference means that not all savers will benefit equally from the Fed rate hike.
The Bottom Line
In both cases, though, a higher target interest rate should lead to better returns for anyone with a savings account. Banks may also be tempted to increase savings account rates as a ploy for catching the attention of new customers. This type of trend can often pressure competitors to do the same, thereby driving up rates for their customers with savings accounts.
While talk of increasing interest rates can worry investors, it shouldn’t scare those who are primarily concerned with their savings account. The cost to borrow money is going to increase, and will increase further following additional rate hikes. That also means that banks will have to pay a higher rate to their customers with savings accounts. If you’re worried about your savings account, this is overall good news.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
