We are days away from knowing if the Federal Reserve will raise rates for the 10th straight time since March 2022.
The next meeting of the Federal Open Market Committee is scheduled for May 2-3. Although some experts believe the Fed could raise interest rates further, inflation is slowing and the the unemployment rate is stable. So there is a chance that the Fed will take a break from rate hikes.
What does this mean for your savings? We spoke to five experts to see what they think will happen next and how you should prepare.
Will the Fed raise rates further?
Experts are divided on whether the Fed will raise rates again or suspend its rate hike. But some experts believe the Fed could raise rates one last time in May.
The last Consumer Price Index Report shows that inflation increased by only 0.1% from February to March – a smaller increase than in previous months. But inflation is still high, at 5% year-on-year. Since we’re not quite within the Fed’s 2% target range, we may see another rate hike, but not as big as the 50-75 basis point increases in the year. last.
“I think the Fed will raise rates by 25 basis points at the May meeting,” said Lawrence Sprung, certified financial planner and author of Personalized financial planning. “That will likely lead to banks adjusting their rates up from where we are today.” While Sprung expects rates to rise a bit more, he doesn’t expect them to top the highs we saw several weeks ago.
Inflation is the highest in more than 40 years, said Chelsea Ransom-Cooper, managing partner and chief financial planning officer at Zenith Wealth Partners. And it doesn’t go down as easily as it goes up.
“Inflation goes up like a rocket but comes down like a parachute,” Cooper said.
The Federal Reserve Bank has raised the federal funds rate several times since 2022 to fight inflation, underscoring the time it will take to stabilize the economy and inflation. She believes it will take time to reach the 2% target rate. “The next FOMC meeting in May could be the last interest rate hike of the year,” she said.
What to expect if the Fed doesn’t raise rates
While some pundits believe the job of containing inflation isn’t done, Powell noted that the U.S. economy has slowed significantly over the past FOMC meeting last month.
“We no longer say that we expect the current rate increases to be appropriate to stifle inflation; instead, we now expect that further policy tightening may be appropriate,” Powell said. Based on Powell’s comments, last month’s consumer price index report and signs of slowing inflation, some experts believe the recent round of rate hikes is over for the foreseeable future.
“I hope they’re done raising funds, but I didn’t want them to after Silicon Valley Bank collapsed, and they did,” said Cary Carbonaro, Certified Financial Planner. and director of the Women and Wealth division at Capital Management Advisors. “We should wait for the dust to settle after all the fast and furious rate hikes we’ve already seen.”
There’s a chance the Fed won’t do anything next week, said Ligia Vado, senior economist for the National Association of Credit Unions. Several reasons can arise:
First, banks are feeling the stress of tighter underwriting standards, brought on by recent bank failures and other factors, she said. Moreover, there is already a decline in access to credit and borrowing. “One could argue that the Silicon Valley Bank effect makes a Fed decision unnecessary,” Vado said.
If the Fed doesn’t raise rates, you can expect one of two things to happen: Rates will remain stagnant, which can be good if you want more time to choose the right account option savings account or continue to earn a decent return on the built-in savings account you already have. On the other hand, rates may come down slowly and any variable rate account may see a decrease in APY, meaning you’ll earn less on your savings. In this case, options with a fixed rate, like a CD, may be worth considering, so you can lock in a high rate now.
How to prepare now for the next Fed decision
“Predicting the outcome of a Fed meeting is always a bit of a gamble, but based on recent trends, we could see the Federal Reserve adjusting policy to address inflation or economic growth concerns,” said Tim Doman, Certified Financial Planner and CEO. of The best mobile banks.
Whatever the Fed’s decision, banks will react to the Fed’s decision by adjusting their rates accordingly, whether that means pushing them up or keeping them stable for a while. Keep an eye on what the Fed is saying and be prepared to adapt your savings strategy if necessary, Doman said. “Flexibility is key in today’s economic environment.”
For now, think about how you plan to allocate your savings to determine the best savings account option. It’s generally a good idea to focus on building up an emergency fund first, then put the extra savings into accounts that can earn better interest rates, like CDs. A fully liquid savings option, such as a high-yield savings account or money market account, gives you access to your money in case you incur an unexpected expense, face a layoff, or rising prices further reduce your salary.
Once you’ve covered the emergencies, a CD is another option to explore. Most CD terms currently offer over 4.00% APY, even for shorter terms. Just make sure that you won’t need the money until the end of the term, otherwise you will have to pay an early withdrawal fee. And if you want more flexibility but also the idea of locking in a fixed interest rate, you can build a CD ladder instead – investing in CDs that mature at different times to give you easier access to your money – instead.
If you have high-interest debt, like credit card balances, you’ll want to focus on paying off those accounts. As the Fed raised rates, savings rates rose, but so did the cost of borrowing, making your credit card balance even more expensive. If you can work out a repayment plan, focus on high-interest debt each month, while putting money aside to save. If you’re paying too much interest to reduce your debt, consider a balance transfer credit card or a debt consolidation loan. A balance transfer card can offer 12 to 18 months to settle your debt, interest free, while a debt consolidation loan usually has lower credit requirements, a lower interest rate than credit cards and can help spread your payments over several years.
Whether your goal is to save more or eliminate credit card debt, now is the time to act. Experts agree that the tipping point for interest rates is fast approaching. You will therefore want to take advantage of the high rates to maximize your savings. And since rates are expected to remain high for the foreseeable future, paying off high-interest credit card debt as soon as possible is also crucial.