Savers are being urged to review their accounts after the Federal Reserve delivered its first interest rate increase in more than three years, lifting the federal funds rate to a range of 3.75% to 4.00%.
The move is expected to push savings rates higher, with the potential for further gains if the Fed raises rates again at its next meeting in October. But savers will need to act carefully to make the most of the changing environment.
Savings moves after the Federal Reserve rate hike
Money that needs to remain readily available could be moved from a traditional savings account into a high-yield savings account. Traditional accounts are currently offering an average rate of just 0.38%, while high-yield accounts provide access to funds without the restrictions attached to fixed-term products.
High-yield savings accounts generally allow deposits and withdrawals without the same limitations associated with certificates of deposit, or CDs. Their variable rates also mean they are positioned to benefit if interest rates continue to rise.
Consumers should compare high-yield accounts and consider moving flexible savings into the most competitive option available to them.
CDs can still offer slightly higher rates than high-yield savings accounts, while locking in a fixed return. That certainty can be useful, but the arrangement also limits the benefit savers receive if rates continue to increase.
Savers considering a CD should therefore avoid depositing more than they can afford to leave untouched. They should also choose a term they are confident they can complete, rather than locking money away for longer than is practical.
Other account types may also suit people seeking higher returns. Money market accounts function in a similar way to savings accounts but can include cheque-writing facilities, while their rates are currently averaging only slightly below those offered by high-yield savings accounts.
High-yield current accounts may also provide an opportunity to earn interest on money sitting in an account before it is used to pay bills.
A higher-rate environment can increase borrowing costs, but it also gives savers more opportunities to improve the returns on their money. Reviewing existing accounts, using CDs cautiously and comparing alternative products could help people benefit from the latest Federal Reserve rate hike.
