High interest rates can benefit savers.
A few times a year, you probably see headlines about the Federal Reserve’s interest rate decisions. It may seem like boring economic news, but it matters more than you think.
The Federal Open Market Committee, the central bank’s decision-making body, meets throughout the year to determine monetary policy and adjust the federal funds rate, which affects the cost of lending between banks.
When interest rates are high, like they are now, the banks pay more to borrow money, and so do you, for loans, mortgages, credit card APRs, etc. Also, when interest rates are high, some banks offer better returns for the money and deposits you keep in their institutions.
The Fed doesn’t directly set what banks charge for loans or pay on savings accounts, but it tends to have a ripple effect for customers. Once the Fed cuts the benchmark rate, we can expect cheaper loan rates and lower returns on your investments.
In short, the Fed doesn’t just impact borrowing costs but savings too. Higher interest rates are good if you’re trying to score a higher yield on your earnings and investments. You’ll just need the right kind of account.
The Fed’s next decision will be announced on Wednesday. Here’s how it will impact your hard-earned cash.
How the federal funds rate impacts your money
Raising the federal funds rate is one tool the Fed can use to help tame inflation. When consumer prices are high, the central bank hikes interest rates to discourage borrowing and to slow the economy. That’s the pattern we saw between early 2022 and 2023.
When inflation is more or less under control but unemployment is high, the Fed cuts interest rates to make it easier — and more enticing — for households to spend money. The Fed carried out three rate cuts in late 2024.
We’ve all been waiting for more rate cuts, but the Fed has held rates steady so far this year to see how Trump’s policies, particularly tariffs, affect the economy. Right now, markets say the Fed will keep the federal funds rate range the same at its June 17-18 meeting.
The Fed isn’t likely to cut interest rates again until September. When those rate reductions come later this year, except to earn a lower annual percentage yield on certain savings accounts.
Holding interest rates high gives your savings a boost
Before you make any financial moves this week, take a moment to assess your savings strategy. First, look at where you’re parking your money.
Traditional savings accounts with brick-and-mortar banks offer the lowest returns on your savings, 0.02% at best. These accounts are often paired with your checking account, an obvious convenience if you prefer to keep all of your money with one bank.
However, if you want to take advantage of today’s high-interest rate environment, I recommend a high-yield savings account.
Online-only banks and credit unions usually offer high-yield savings accounts, some with APYs between 3% and 4%. Those rates are still variable, so they could go down in a few months. But you’ll still make more money back with an attractive rate than you would at a traditional bank.
If you’re not convinced, here’s a comparison chart:
Comparing savings accounts
Traditional savings account High-yield savings accountMostly brick-and-mortar, so you can do transactions in person. Mostly online, so you won’t visit a physical branch too often.APYs around 0.02%. If you have $1,000 in savings, you’ll earn a couple of dollars after a year. Best APYs around 4%. If you have $1,000 in savings, you could earn $30 to $40 after a year.Often comes with maintenance fees that can dig into your savings. Usually has lower or no fees because there are fewer overhead costs.
