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On Wednesday, the Federal Reserve may raise the federal funds rate for the 10th consecutive time to help reduce inflation. While interest rate hikes by the Fed indirectly made borrowing more expensive, it also made saving more rewarding, with some Certificates of Deposit and high-yield savings rates in excess of 5.00% APY. But we may have reached a tipping point.
At the FOMC meeting, some experts think the Fed may raise interest rates again. However, since inflation is cooling and the unemployment rate is stable, other experts believe that there is still a chance that the Fed will pause interest rate hikes, which could cause savings and stock rates to stagnate or even decline slightly.
Here’s what five experts predict and what it means for your portfolio.
Read more: The Fed rate hike decision will be made on Wednesday. Here’s what that means for your savings
Will there be another Fed rate hike?
Experts are divided on whether the Fed will raise interest rates again or pause their hikes. But some experts think the Fed may raise interest rates once last May.
The latest Consumer Price Index report shows that inflation rose just 0.1% from February to March – a smaller increase than in previous months. But inflation remains high, at 5% year-on-year. Since we are not at the Fed’s 2% target range, there is a possibility that we could see another rate hike, but not as significant as last year’s 50-75bp increase.
“I think the Fed will raise interest rates by 25 basis points at the May meeting,” said Lawrence Sprung, a certified financial planner and author of Financial Planning Made Personal. “This is likely to cause banks to adjust interest rates higher than we are today.” While Sprung expects rates to rise a bit more, he doesn’t expect them to go above the high levels we’ve seen for several weeks.
Chelsea Ransom Cooper, managing partner and director of financial planning at Zenith Wealth Partners, said inflation is the highest in more than 40 years. It does not go down as easily as it goes up.
“Inflation goes up like a rocket, but it comes down like a parachute,” Cooper said.
The Federal Reserve has raised the federal funds rate several times since 2022 to combat inflation, indicating how long it could take to balance the economy and inflation. She believes it will take some time to reach the target rate of 2%. “The next meeting of the Federal Open Market Committee in May could be the last rate hike this year,” she said.
What can be expected if the Federal Reserve does not raise interest rates?
While some experts believe the work of taming inflation is far from over, Powell indicated at the FOMC meeting in March that the US economy has slowed significantly.
“We no longer state that we expect continued interest rate increases to be appropriate to suppress inflation; instead, we now expect that some additional policy may be appropriate,” Powell said. Based on Powell’s comments, last month’s CPI report, and signs of slowing inflation, some experts believe that the recent series of rate hikes is over for the foreseeable future.
“I hope they finish raising, but I didn’t want to raise them after the Silicon Valley collapse, and they did,” said Kari Carbonaro, a certified financial planner and director of women and wealth at Advisors Capital. administration. “We’ll have to wait for the dust to clear from all the rapid and violent spikes we’ve already seen.”
There is a possibility that the Fed will do nothing, said Ligia Vado, chief economist at the National Association of Credit Union. There are several reasons it can occur.
First, banks are feeling pressure from tightening underwriting standards, triggered by recent bank failures and other factors, she said. Moreover, there is already a decline in access to credit and borrowing. “It could be argued that the influence of Silicon Valley makes Fed action unnecessary,” Fado said.
If the Fed doesn’t raise rates, you can expect one of two things to happen: Rates will remain flat, which can be good if you want more time to pick the right savings account option or continue to earn a decent return from the high-yielding savings account you already have. . On the other hand, rates may decrease slowly, and any variable rate account may see a decrease in APY, which means you will earn less on your savings. In this case, fixed-price options, such as CDs, may be worth considering, so secure a high price now.
What does the Fed’s next move mean for your money?
said Tim Doman, Certified Financial Planner and CEO of Best Mobile Banking.
Whichever way the Fed goes, banks will respond to the Fed’s move by adjusting their rates accordingly, whether it pushes interest rates higher or keeps them stable for a while. Watch what the Fed says and be prepared to adapt your savings strategy if necessary, Doman said. Flexibility is key in the current economic environment.
For now, think about how you plan to allocate your savings to determine the best savings account option. It’s generally a good idea to focus on building an emergency fund first, and then put additional savings away in accounts that might pay better interest rates, such as CDs. An all-liquid savings option, such as a high-yield savings account or a money market account, allows you to access your cash in case you encounter an unexpected expense, face layoffs, or find high rates cutting into your paycheck even further.
Once emergencies are covered, a CD is another option worth exploring. Most CD terms offer more than 4.00% APYs right now, even for shorter periods. Just make sure you don’t need the money before the term expires – or you’ll face early withdrawal fees. And if you want more flexibility but also like the idea of a fixed-rate fixation, you can build a CD ladder—investing in CDs that come at different times to give you easier access to your money—instead.
If you carry high-interest debt, such as credit card balances, you’ll need to focus on paying off these accounts. As the Fed raises interest rates, saving rates go up, and so does the cost of borrowing — making your credit card balance more expensive. If you can calculate a payment plan, focus on putting as much high-interest debt as possible each month, while still setting aside some money for savings. If you’re paying too much interest to factor into your debt, consider a balance transfer credit or debit card debt consolidation loan. A balance transfer card can offer 12 to 18 months to process your debt, without interest, while a debt consolidation loan usually has lower credit requirements, a lower interest rate than credit cards and can help stretch your payments over several years.
Whether your goal is to save more or get rid of credit card debt, now is the time to act. Experts agree that the tipping point for interest rates is coming soon, so you’ll need to take advantage of higher rates to maximize your savings. And with interest rates expected to remain high for the foreseeable future, it’s also imperative to pay off high-interest credit card debt sooner rather than later.