Finding extra cash to set aside can be tough amid the record high prices prompted by historically high inflation.
But the Federal Reserve’s announcement on Wednesday that it will again hike interest rates by 0.75 percentage points will mean savers can get better a better return on the money they sock away.
The U.S. central bank’s latest move is its latest effort toward its goal of bringing inflation down to its 2% target rate. The Consumer Price Index, which measures the average change in prices for consumer goods and services, jumped 9.1% in June from a year ago, a higher read than expected with the fastest pace dating back to 1981.
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The Fed’s preferred inflation measure — core personal consumption expenditures prices — rose 4.7% in May from a year ago, also setting multi-decade records.
“The interest rates can either be an accelerator or a break for the economy,” said Greg McBride, senior vice president and chief financial analyst at Bankrate.com.
“Right now, the Federal Reserve is pressing very firmly on the break in an effort to reduce demand and bring down inflation,” he added.
While borrowing will become more expensive, those higher interest rates will reward savers. Admittedly, it may be some time before those returns compete with inflation.
“Inflation needs to come down in a big way before those higher savings rates really shine,” McBride said.
Nevertheless, it is a good idea to have emergency cash set aside. Experts generally recommend at least three to six months’ worth of expenses, depending on your situation.
“This is a decision based on need for liquidity and your broader financial goals,” McBride said.
Online savings accounts started the year with rates around 0.5% and are now above 2%.
That upward momentum should continue, McBride predicts.
“I wouldn’t be surprised if we hit 3% by the fall,” he said.
Money market accounts are also similarly poised to see a jump in rates, he said.
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“We will see more responsiveness to the rising rates on the shorter maturity CDs — the six-month, the one year,” McBride said.
Six-month CDs currently top out at 2.25% to 2.3%, which may see some real upward momentum, he said.
The movement on longer durations — such as three-year, four-year and five-year CDs — will likely be more tempered amid recession fears, McBride predicted.
Series I bonds, which currently offer a 9.62% annual rate through October, have been a win for savers who want higher returns closer to inflation.
Yet those rates are not pegged to the Federal Reserve. Instead, they are based on government inflation data.
“As inflation comes down so, too, will the returns on the I bond, because they are structured to essentially reimburse you for inflation,” McBride said.
So as the Fed gets inflation down to 2%, I bonds will also go down to that level, though it will not happen overnight, he said. A new annual rate on Series I bonds is set to be announced in November.
Notably, Series I bonds have purchase limits and require you to commit to holding your money for one year. Plus, you will pay a penalty if you sell within five years.
Consequently, if you’re looking for a place to store emergency cash, you may want to choose an account that’s more accessible.
“If you’re short on emergency savings, you need a savings account or a money market deposit account,” McBride said.
“It doesn’t matter whether interest rates are 0% or 10%,” he added. “That needs to be liquid.”