The Federal Reserve raised interest rates for the ninth time in a row on Wednesday, opting to continue its campaign against high inflation despite stress in the banking industry following the collapse of two regional banks.
Fed policymakers voted unanimously to raise their benchmark interest rate by a quarter percentage point to just under 5%, which will make it more expensive for people seeking car loans or carrying a balance on their credit cards.
“Returns on savings accounts and CDs are the best in 15 years,” said Greg McBride, chief financial analyst for Bankrate. “But the average credit card rate is now at a record high above 20%, auto loan rates are at a 12-year high and mortgage rates are still north of 6.5%. It is as important as ever for savers and borrowers to shop around to get the benefit, or minimize the impact, of rising interest rates.”
So here are some ways to position your money to get the most out of higher rates, while also protecting yourself from their costs.
Powell acknowledged that some banks may reduce their pace of lending at a time of high anxiety in the financial system. Any such pullback in lending, he said, could slow the economy and possibly act as the equivalent of an additional quarter-point rate hike.
“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,” the Fed chair said. “It is too soon to determine the extent of these effects and therefore too soon” for the Fed to know how or whether its plans for interest rates might be affected.
Wednesday’s rate hike, the Fed’s ninth since last March, suggests that Powell is confident that the Fed can manage a dual challenge: Cool still-high inflation through higher loan rates while defusing turmoil in the banking sector through emergency lending programs and the Biden administration’s decision to cover uninsured deposits at the two failed banks.
The Fed’s signal that the end of its rate-hiking campaign is in sight may also soothe financial markets as they digest the consequences of the banking turmoil and the takeover last weekend of Credit Suisse by its larger rival UBS.
Pressed at his news conference about the Fed’s missing what observers say were clear signs that Silicon Valley Bank was at high risk of collapsing into the second-largest bank failure in U.S. history, Powell acknowledged that “we do need to strengthen supervision and regulation.”
But he declared the overall banking system secure, saying, “These are not weaknesses that are there at all broadly through the system.”
Another high-yield savings option
Given today’s still-high rates of inflation, Series I savings bonds may be attractive because they’re designed to preserve the buying power of your money. You can still get the current 6.89% rate on the I Bond if you purchase it before the end of April.
That rate will stay in effect for six months if you complete your purchase before it resets on May 1. If inflation falls, the rate on the I Bond will fall, too.
There are some limitations: You can only invest a maximum of $10,000 a year. You can’t redeem your bond in the first year. And if you cash out between years two and five, you will forfeit the previous three months of interest.
What factors determined the rate increase
With banking stresses easing in recent days, most economists reckoned officials would lift the fed funds rate by a quarter point. That would give a nod to the banking troubles by hiking less than the half point markets predicted before the crisis. But it would keep the Fed on track to curb inflation that has surged again so far this year after easing in late 2022. Job growth, pay increases and consumer spending also have accelerated after downshifting last year, compounding inflation concerns.
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