The Fed changing rates could affect how you save money.
PLUS + I'll show you how to get a higher interest rate return than most banks offer.
The Federal Reserve (Fed) controls interest rates. They use interest rates as a tool to fulfill their dual mandate.
1. Maximum employment by keeping the unemployment rate low.
2. Price stability by maintaining inflation at a 2% yearly target.
How the Fed is fulfills its dual mandate affects your car loan, mortgage rate, credit cards and savings account yields. The funds rate is set by the fed and is the interest rate at which banks loan money to one another.
Impact of interest Rate Fluctuations
High Fed Rates: When federal funds rates go up, interest rates on high-yield savings accounts (HYSA) and Certificates of Deposit (CD) go higher as well. Some banks are offering savings rates as high as 5% annual yield (APY). As a downside to consumers, a high fed rate makes borrowing money expensive. The average 30-year fixed mortgage rate is 7.035%, making home ownership unattainable for many.
Low Fed Rates: Low interest rates are designed to boost economic growth. Money flows easily from the federal reserve's coffers to consumers and businesses because borrowing costs are low. When the Fed funds rate was at near 0 during covid, the housing market was wild. Houses were going for tens of thousands above asking. Even the most undesirable of homes were subject to bidding wars. Money was cheap to get and easy to use. Savings accounts offer minimal APYs when Federal rates are low.
Current Economic Conditions and the Fed’s Response
Remember that the goal of the fed is to maintain inflation at 2%. The Fed started increasing rates in March of 2022 in response to 8.5% inflation. It stopped increasing rates at around 5%.
Recently, the Fed has been seeking signs of an economic slowdown, and it has found them.
1. The US added 818,000 fewer jobs than expected from March 2023 to March 2024.
2. Inflation is at 2.89%.
It is expected that the Fed will start lowering interest rates in September 2024, which means savings accounts will lower the yields they offer to consumers. Banks are able to change the interest rates on HYSAs at any time, but you can lock in a high rate for yourself by buying somewhere else.
Cut Out the Middle Man
Many financial influencers won’t tell you this because the banks give them kickbacks to advertise their products. The bank takes your money and buys treasury bills at a rate of about 5.5%. They then turn around and offer you 4.5% interest, pocketing that 1% difference for themselves. You can buy treasury bills directly from the government and get the better rate.
1. Go to https://www.treasurydirect.gov/
2. Login or make an account
3. Click on BuyDirect
4. Click on Bills - Short-term securities of 1 year or less
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