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How the September 2022 Fed Rate Hike Will Affect Your Bank Account

The Federal Reserve’s federal funds rate has been in the news a lot this year and for good reason. The Fed has raised its rate five times since March 2022, the largest increase in a calendar year since 2005. Most recently, on September 21, the rate hit 3%.

This rate seems big and it keeps changing – and here’s the part that can affect you: when the Fed rate goes up, banks and credit unions tend to raise their rates on deposit accounts. The bottom line: You can earn more interest on your savings. Here is a brief overview of the Fed rate and its effect on different types of bank accounts.

Fed rate hikes mean higher savings rates

One of the Fed’s roles as american central bank can be likened to driving the economy on a highway at a brisk pace. And the federal funds rate, or Fed rate, is a key tool to help. The rate itself is the cost of borrowing cash overnight between banks.

Generally, a falling Fed rate is the Fed pushing the accelerator to stimulate the economy (with cheaper loans); and a rising Fed rate means the Fed is stepping on the brakes to slow the economy (with more expensive loans). Higher borrowing costs are passed on from banks to consumers and businesses, who then tend to spend less. And a decline in demand for goods and services can help reverse the upward trend in costs, also known as inflation.

Part of a bank’s business is to fund loans using customer deposits. To attract more customers in a rising rate environment, banks often compete by raising their rates on savings accounts. The same goes for credit unions, the not-for-profit equivalent of banks.

After rate increases, “credit unions tend to raise their interest rates on deposit accounts faster than banks,” says Mike Schenk, chief economist at the Credit Union National Association.

Online banks and online credit unions also distinguish themselves from traditional banks by being among the first institutions to raise the rates of their high yield savings accounts after a Fed rate hike, a trend NerdWallet has observed.

3 bank account rates increase, 1 not

Banks and credit unions typically move their deposit rates toward the Fed rate, “but there are differences within different categories of deposit accounts,” Schenk says.

Here is the general impact of a Fed rate hike on each type of bank account:

1. Savings accounts

Interest rates are rising, especially at online institutions.

Your bank may raise its rate for your current savings account, but this may not happen instantly or even at all if your account is at a major national bank. Also, keep in mind that savings accounts have variable rates, so they’re likely to change over time.

Your best bet is a high-yield savings account whose rate is usually several times higher than the dismal national average. For savings accounts, this average is 0.17% annual percentage yield, according to the Federal Deposit Insurance Corp. My online savings account changed its rate from 0.40% APY last December to 1.60% in August. I’ve earned about $200 in interest so far this year, which is more than I’ve earned in interest all of last year. Learn more about the The impact of the Fed on savings accounts.

2. Certificates of deposit

Interest rates are rising, especially at online institutions.

Certificates of deposit take the biggest hit after a Fed rate hike. CDs, a type of savings account that locks your funds in advance for a pre-determined period, have fixed rates so you can predict the exact amount earned over the years. The only catch is an early withdrawal penalty that usually hits if you need funds before the end of a CD’s term.

As with high-yield savings, high-yield CDs are usually available at online institutions and the rates are much higher than regular savings accounts. CD terms typically range from three months to five years, and the longer the term, the higher the rate. At best, we’re talking over 3% APY for current one-year, three-year, and five-year CDs. In contrast, the national average rate for a five-year CD is 0.74% APY, according to the FDIC. Learn more about the The impact of the Fed on CDs.

3. Money market accounts

Interest rates are rising, especially at online institutions.

Money market deposit accounts have similar rates and features to regular savings accounts, except for occasional checking account-type perks, such as a debit card or check writing. When banks align their rates with the Fed rate, rates for high-yield money market accounts are comparable to those for high-yield savings accounts. And their low national average rates also align closely with the national MMA average of 0.18% APY. Traditionally, the minimum balance of an MMA is higher than that of a regular savings account, but some of the best accounts have no minimum.

4. Verification of accounts

Interest rates, if available, do not increase.

A current spending account usually earns no interest, so there’s no rate to raise. But if you have an interest-bearing current account, don’t expect a rate increase. The national average of verification of the interests of 0.04% APY has remained almost completely stable since March 2021, based on NerdWallet analysis of FDIC data. Additionally, at least two online interest verification rates have dropped since 2020.

A juxtaposed account: Cash management accounts

Interest rates may increase, especially at online brokerages.

Cash management accounts typically hold cash for investors and are available at some online businesses. Like bank accounts, CMAs are federally insured to protect your money in the event of a bank failure. Brokers tend to work with multiple banks to offer these accounts, and after the Fed increases rates, their rates may go up, which has already happened this year.

What’s next for the Fed rate

The Fed’s Federal Open Market Committee decides whether to make changes to the Fed’s rate at its eight meetings a year, and two remain in 2022, November 1-2 and December 13-14. . It can also make emergency changes. High inflation has been a frequently cited concern and reason to raise the rate, and if that persists, we’re likely to see more rate increases.

A previous version of this article incorrectly indicated when the Federal Open Market Committee made changes to the federal funds rate. This article has been corrected.