Lock in High Deposit Rates Before the Fed's Next Move
The Federal Reserve has a major influence on the interest rates banks pay consumers on deposit accounts like savings and CDs. With the Fed's next rate decision looming at the end of July, now may be your last opportunity to take advantage of today's historically high deposit rates before potential cuts.
The Federal Open Market Committee (FOMC), the Fed's policymaking arm, meets every 6-8 weeks to assess economic conditions and adjust the federal funds rate accordingly. The federal funds rate is the interest rate banks charge each other for overnight lending to meet reserve requirements.
While the Fed funds rate doesn't directly dictate the rates banks offer to consumers, the two are closely correlated. When the Fed raises its rate to combat inflation, deposit rates from banks tend to rise as well. Conversely, rate cuts by the Fed generally lead to lower consumer deposit rates.
At its latest meeting on June 13th, the FOMC decided to maintain the federal funds rate within the 5.25%-5.50% range it has held since earlier this year. However, with inflation showing signs of moderating, speculation is growing that the Fed could start cutting rates at its next meeting on July 30-31 to provide more economic stimulus.
This makes the coming weeks potentially the last opportunity to lock in one of today's high deposit rates before the Fed potentially lowers its benchmark rate, leading to inevitable rate cuts from banks. Top nationally available savings accounts and certificates of deposit (CDs) are currently offering annual percentage yields (APYs) of 4-5% and higher.
To put those rates into perspective, the average interest rate on a regular savings account is currently just 0.45% according to the FDIC. On a $10,000 deposit, that paltry rate would earn you only $45 in interest over a year. But at a 5% APY available from the best savings and CD rates, that same $10,000 deposit could earn $500 in annual interest - more than 10 times higher.
While we can't be certain what moves the Fed will make at the end of July, locking in one of today's competitively high CD or savings rates ahead of time ensures you preserve that premium return even if broader rates start trending downward soon after. Many of the top CD rates today even come with relatively short terms of 6-12 months.
Of course, if the Fed surprises by holding rates steady or even raising them further at the July meeting, today's high deposit rates will remain a strong value regardless of when you open an account.
For savers and investors, taking a few moments to review your current accounts and reallocate funds to higher-yielding options is likely a wise move before the Fed's next rate decision. Don't leave your hard-earned cash earning paltry returns when safe, risk-free accounts paying 10x more are readily available.
The Fed's rate policies have major ripple effects on consumer finances. Staying informed and acting ahead of potential changes to secure higher, fixed returns on cash deposits is a simple way to make the most of your savings amid an evolving economic environment.