The Federal Reservepaused its series of interest rate hikeson Dec. 13, leaving itstarget for thekey federal funds rate, which influences everything from car loans to savings accounts,atbetween 5.25 percent and5.5 percent.
Why did theFed raise rates? Put simply,the Fed raised ratesto slow the economy and reduce inflation. When it’s more expensive to borrow money, businesses and consumers alike are less likely to spend as much of it. That, in turn, slows growth and demand.
So far, the strategy has worked, and the trick for the Fed is to keep inflation low and the economy humming. Inflation ran at 3.1 percent in November, down from 9.1 percent in June 2022.
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Although that’s still a ways from the Fed’s stated target rate of 2 percent inflation, it’s enough that the Fed has signaled rate cuts, not hikes, in 2024.For the first time in years, savers can get a positive return from their investments after inflation. When inflation was soaring, the combination of low interest rates and rising prices meant that savers effectively lost money after inflation. Here’s more on how the rate hikes can affect you and your money.
Happy days for savers
Although the Fed’s rate hikes havecooled the economy, they have been a gift to savers.After the Feddropped rates tonear zero at the onset ofthe pandemic, the most savers could get from a bank certificate of deposit (CD) was a warm handshake from a teller.
No longer. Some banks are offering as much as 5.6 percent on a one-year CD, according to Bankrate.com. That’s $560 on a $10,000 deposit. Similarly, ultrasafe, short-term Treasury securities are also offering yields above 5.5 percent. A few online banks are paying 5 percent interest on savings accounts with no minimum balance.
Still tough times for borrowers
For those shopping for a new home, rising rates have been as welcome as a flooded basem*nt. A 30-year fixed-rate mortgage is now averaging 7.18 percent, up from a low of less than 3 percent in 2020 and 2021.
The monthly principal and interest payment on a 30-year, $300,000 mortgage loan at 7.18 percent is $2,002, up from $1,265 at 3 percent. The higher payment has chased many buyers out of the market.
