What the Fed's Latest Hike Could Mean for Savers and Borrowers

The Federal Reserve announced today that it is raising interest rates another quarter percentage point, a move that may help you earn even more on your savings than today's record-high rates already offer. But it could also make your credit card debt or future loans more expensive.

Still, this year's rate hikes have had a more muted effect than those that happened last year, so the impact for consumers is not expected to be dramatic.

How This Rate Hike Could Impact Your Savings

The Fed's 2022-2023 campaign to fight decades-high inflation by dramatically raising interest rates has been a boon to those with cash to put in the bank. Today's hike is the tenth consecutive rate increase from the Fed since March 2022, and elevates the federal funds rate to a range of 5.00%-5.25%, its highest level since 2006. This remarkable rise has pushed interest rates on high-yield savings accounts and certificates of deposits (CDs) to record levels, with dozens of options returning upwards of 5.00% APY.

That's because the federal funds rate has a direct impact on how much interest banks and credit unions are willing to pay to consumers for their deposits. For savers who shop around, it's easy to score a return in the mid to upper 4% range on your cash savings, and even as high as 5.50% APY with the best industry-wide CD.

Top Savings and CD Rates vs. National Average Rates

But will rates go higher still? It's certainly possible, and probably likely among a subset of banks and credit unions that held off on rate increases until today's Fed hike was a sure thing. But it's also likely that some made their increases already, confident of Fed rate expectations, given how widely expected the decision was.

In any case, as soon as there is any hint the Fed's rate-hiking campaign has run its course and is heading for a plateau, or worse, has a rate decrease on the near horizon, rates on deposit accounts will begin to dim. And if your funds are in a savings or money market account, where the annual percentage yield (APY) can change at any time, you'll suffer the rate whims of the market.

In contrast, if you can afford to stash funds in a CD for a number of months or years and lock in today's stellar rates, you can be guaranteed that return for the certificate's full term. It's a smart way to prolong your ability to earn these record yields, even after the Federal Reserve moves into neutral or reverse.

What About the Impact on Borrowing Rates?

While Federal Reserve increases are the saver's friend, they can be the borrower's foe. Variable credit rates, such as those on credit cards, are often directly influenced by changes in the federal funds rate, and when the Fed raises rates, any balances you're carrying could get more pricey to pay off.

Rates on personal loans can also rise as a result of Federal Reserve rate increases. If you have an existing loan and it has a fixed-rate, the Fed hike will fortunately have no bearing on your payments. But those seeking out a new personal loan this year may find that rates have moved higher.

Auto loan rates can also get pricier as a result of Fed policy, though the link between the federal funds rate and what auto lenders charge for new loans is a little more tenuous than short-term and variable-rate debt. 

What about mortgage rates? Of course, if there is any impact on mortgage rates, it would only be for new or refinanced loans, or existing adjustable rate loans. Existing fixed-rate mortgages would be unaffected.

But the idea that Fed increases directly push mortgage rates higher is a misconception. Mortgage rates are much more closely linked to 10-year Treasury notes, whose movement is driven primarily by demand in the bond markets. They are also impacted by inflation, job creation rates, and overall economic growth.

Still, Tom Graff, head of investments at Facet Wealth, said he sees a larger gap than usual between the 10-year Treasury rate and mortgage rates, which is caused by the frequent fluctuations in the federal funds rate. "I think we could be in a place where that volatility starts to subside a little and so there's probably is a bit of downside to mortgage rates," he said.

Will the Fed Raise Rates Again?

It is always impossible to reliably predict what the Federal Reserve will decide at its next meeting, which in this case is six weeks away. But the wording of the Fed's announcement today omitted language it contained after the last meeting to indicate the committee's work was not done and future 2023 increases were expected.

This time around, the Fed made no such statement, indicating it would wait and see what the next rounds of economic data bring, and reserving judgment on future hikes until its June 13-14 meeting. At the time of this writing, about 30% of futures traders predict we will see another hike from the Fed this year.

Rate Collection Methodology Disclosure

Every business day, Investopedia tracks the rate data of more than 200 banks and credit unions that offer CDs and savings accounts to customers nationwide and determines daily rankings of the top-paying accounts. To qualify for our lists, the institution must be federally insured (FDIC for banks, NCUA for credit unions), and the account's minimum initial deposit must not exceed $25,000.

Banks must be available in at least 40 states. And while some credit unions require you to donate to a specific charity or association to become a member if you don't meet other eligibility criteria (e.g., you don't live in a certain area or work in a certain kind of job), we exclude credit unions whose donation requirement is $40 or more. For more about how we choose the best rates, read our full methodology.