In December, the Federal Reserve raised the target range for the Federal Funds rate from 0.25% to 0.50% as the US economy is “performing well and expected to continue to do so.” The Fed interest rate is the interest rate that banks earn when they deposit money at the Federal Reserve (the US’ central bank and the safest place for US dollars).
For banks, the Federal Reserve rate increase means higher interest rates on their money now, but what are the implications for regular savers with savings accounts?
Here are three takeaways if you have a savings account, or are considering opening one.
1. Savings may be passed on to you.
As banks can earn higher interest rates on their money, over time these interest rates may be passed on to savers as banks compete with each other for customers’ savings. This process will take place slowly, so savers may not notice higher amounts in savings accounts until the Federal Reserve raises interest rates significantly.
2. You can shop for the best rates.
With the Federal Reserve increasing interest rates from around zero and banks slowly passing those interest rate increases on to savers, it is well worth the time to shop around for the best rates on savings accounts. This is especially true as many large banks are still offering little to no interest on savings accounts. Don’t forget, the difference between earning 0.95% and 0.01% is not just the order of the numbers, it is 95x more interest earned in your savings account.
3. Your dollars can go further.
With a relatively healthy economy and interest rates climbing in the US, the dollar’s value has risen. This means that travelers’ dollars go further in many countries around the world when compared to last year. Now is a good time to start saving for an international vacation to take advantage of the strong currency.
While the Federal Reserve interest rate increase may mean a little more interest in your savings account, practicing good money habits consistently will help you the most. Build an emergency fund, keep your spending within your means, save regularly, and remember your goals to keep motivated.
Discover Bank, Member FDIC