How the Fed’s monetary policy can impact your savings accounts

Due to the Fed’s rate hikes in 2022 and 2023, it’s become more expensive to borrow and more lucrative to save. When the Fed changes the federal funds rate, it impacts everything from credit card APRs to mortgage rates to high-yield savings account annual percentage yields (APYs).

We’ll dive into how the Fed’s rate changes affect how much you earn on your savings. But before that, here are a few key terms you should know: 

• APY: The amount of interest your savings account earns in a given year.
  • Fixed APY: Rates that remain unchanged for a set period. 
  • Variable APY: Rates that fluctuate depending on economic changes. 
• High-yield savings account: A type of savings account that offers a higher yield on the money you keep in your account than traditional savings accounts. 
• Certificate of deposit (CD): A type of savings account that pays interest in exchange for setting aside money for a fixed period of time.

How the Fed’s monetary policy can impact savings accounts 

When the Fed hikes rates, it costs more to borrow money, so it’s more expensive to take out a loan or carry any type of debt. Rate hikes can also lead to layoffs—some companies may cut expenses in response to higher borrowing costs.

"Higher interest rates slow spending and encourage savings among households and businesses,” says Steve Rick, chief economist at CUNA Mutual Group. “This reduction in spending and investment will slow economic growth and inflationary pressures.” 

However, higher rates have some benefits: the APY on your deposit account (like your high-yield savings account or CD) increases when the federal funds rate rises, making saving more attractive than spending. 

The opposite is true when the Fed decreases the federal funds rate: APYs decline. According to the FDIC, the national deposit rate on savings is only 0.45%. 

Since rates remain high, now is a good time to put some money into savings—especially since we’re not sure when the Fed may decide to make a rate cut.

3 ways savers can take advantage of a higher rate 

If you’re unsure of how to take advantage of the current high interest rates, here are a few ideas: 

1. Shop around for the highest possible rate: Make sure to compare rates across various savings products.You may also benefit from promotional offers that could waive or lower your opening deposit or monthly fee. Bonus tip: online banks typically offer higher rates than brick-and-mortar banks because they have lower operating costs. 
2. Boost your savings: Take this time to revamp your budget and see where you can make cuts to reallocate funds into your savings. If you don’t have a budget, don’t sweat it. Budgeting strategies like the 50/20/30 method or zero-based budgeting can help you figure out where you may be overspending and how to reorganize. 
3. Let compound interest work for you: Sometimes one of the best ways to build your savings is to not touch them. When you make frequent withdrawals, you’re lowering the principal balance in your savings account and the potential interest you could earn. If you have a hard time not dipping into your savings, consider a CD. CDs offer a higher, fixed interest rate and penalize you for early withdrawals, so you might be more incentivized to keep your hands off. 

The takeaway 

When the Fed changes interest rates, it affects rates on a range of consumer banking and financial products. While the Fed may still reduce rates later in 2024, consumers can continue to take advantage of high-interest rates by putting their money in a high-yield savings or money market account. 

However, since these accounts are variable-rate accounts, the APY fluctuates with changes in the federal funds rate. If you want a lock in rates, consider investing in a longer-term account or asset like a 5-year CD or a Treasury security.