:max_bytes(150000):strip_icc()/2023.04.28Fedhike-Womanreadingnewspaper-d5e9e359eb034e8baab0586041d27437.jpg "What a Fed Rate Hike Could Mean for Your Deposit Accounts")
The odds of different Fed rate decisions can be seen in the price of federal funds futures, which incorporate market expectations for the fed funds rate. As of this writing, they indicate about an 86% probability of the Fed implementing another quarter-point increase on Wednesday.
While another interest rate hike may increase deposit returns, there are a few reasons it may not have as much of an impact this time around. For one, the magnitude of this increase is relatively small compared to what’s happened in the last 13 months, and therefore, any hefty rate bumps are probably behind us. Second, many banks and credit unions set rates in anticipation of what the Fed will do in the near term, meaning some institutions are already paying what will make sense to their balance sheets after the next Fed increase.
Still, if you’ve been enjoying the current high rates in an account where the annual percentage yield (APY) can change, like a high-yield savings account, it’s a good time to consider socking some of your money away in a CD, as that enables you to lock in one of today’s stellar rates for months or years into the future.
Warning
Not letting perfect be the enemy of good is sound advice for CD buying right now. While rates may edge up a bit if the Fed implements another increase, there is no guarantee. So if you’re looking to put funds in a CD, do your homework, find a top-paying option, and lock in what is already an exceptional rate, without fretting that you may have been able to do a small increment better. Wait too long and you could just as easily end up earning an increment worse.
What About Borrowing Rates?
On the flip side of saving is borrowing, and this is where Fed rate increases are not your friend. Credit card rates are often directly impacted by the Fed’s rate decisions. Just as banks raise deposit rates when the federal funds rate rises, they also bump up their credit card interest rates, making balances you’re carrying even more expensive to pay off.
The cost of personal loans can also be adversely affected by Federal Reserve’s rate increases. In theory, when the federal funds rate rises, so too do personal loan rates. However, the appeal of personal loans has skyrocketed in recent years, intensifying competition among lenders. As a result, what would have been a bigger incline in personal loan rates has been notably blunted by lenders trying to attract customers with lower rates.
Auto loan rates can also be driven up by the Fed’s rate increases. Though the connection between the federal funds rate and what auto lenders charge for their loans is less tightly correlated than deposit rates and credit card interest, a rising fed funds rate does have some impact.
Important
Perspective is important here. Yes, another hike by the Fed could raise the rates on various consumer debt types. But with an increment as small as 0.25%, the cost is also likely to be minor at this point. Keep in mind that the federal funds rate has already moved up 4.75% since March 2022.
It’s a common perception that when the Fed hikes rates, it causes mortgage rates to rise. This is not true in any direct way. Mortgage rates are instead closely linked to 10-year treasury notes, and their movement is driven primarily by demand in the bond markets, rather than any direct impact from the federal funds rate. (Mortgage rates are also impacted by inflation, job creation rates, and overall economic growth.)
However, it is true that a fed funds rate can impact bond markets, which can, in turn, affect the direction of mortgage rates. So this secondary effect on mortgage rates is not uncommon. Still, occasionally, the fed funds rate and mortgage rates simultaneously move in opposite directions, which is what happened in December when mortgage rates declined due to falling inflation.
Of course, any impact on mortgage rates would be for new or refinanced loans. If you already hold a fixed-rate mortgage, movements by the Fed will have no bearing on your existing rate. If you have an adjustable rate loan, however, Fed rate increases could trigger market conditions that impact your next adjusted rate.
What If the Fed Holds Rates Steady Instead?
Despite the high odds suggesting otherwise, it’s still conceivable the Federal Reserve will make no rate move at all on Wednesday, holding the federal funds rate where it is. One possible outcome of this is that rates on saving and borrowing simply carry on at current levels.
Alternatively, some rates could start to dip, particularly at institutions that were heavily expecting a rate hike and therefore baked that expectation into their rates some time ago. Faced with a potential Fed rate plateau, or signs that rate decreases could soon be on the table, some banks and lenders might opt to drop back a bit on rates.
If the Fed holds rates steady on May 3, one thing is certain: all eyes will quickly move to the probability of a rate change at the next Fed meeting in June. Lenders will be looking for whatever clues they can find on whether the Fed’s non-movement in March means the 2022-2023 rate-hike campaign is over, or is simply on pause.
Rate Collection Methodology Disclosure
Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account’s minimum initial deposit must not exceed $25,000.
Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don’t meet other eligibility criteria (e.g., you don’t live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.
