The Federal Reserve Board of Governors will meet Tuesday and Wednesday in Washington, D.C., and the financial leaders are expected to raise interest rates again. While that makes borrowing money more expensive, it can be good news for your savings.
The Fed has two main goals: maximize employment and minimize inflation. And the only tool it can use to achieve those goals is changing interest rates.
“When you raise interest rates, you slam on the brakes of the economy, because you make it more expensive to borrow money for any reason,” explained Victor Claar, an associate professor of economics at Florida Gulf Coast University.
In June, the Fed decided not to raise rates, citing the positive trend in job growth and unemployment. But the board is expected to raise rates this time around.
At the beginning of the pandemic, the Fed dropped interest rates to near zero. In March 2022, it raised interest rates for the first time in almost two years.
Fast forward to today, and interest rates are just over 5%. Rate increases impact things like car loans, credit cards, mortgages and more.
“If we go to the bank for a personal loan, or a car loan, interest rates there have increased a couple percentage points over the past year. And while a couple of percentage points doesn’t sound like a whole lot, but it can mean thousands of dollars over the life of a loan, particularly when you’re talking about something like a mortgage,” said Elizabeth Renter, a data analyst with NerdWallet.
But the rate hikes seem to be helping. Inflation has slowed in recent months, but prices on gas, groceries and necessities are still high.
“If the Fed’s policy is having the impact they hope, it slows this price growth, but it doesn’t necessarily turn it negative. So that means you might not see prices come down on some items when you go to the grocery store,” explained Renter.
The goal is to slow inflation long enough so increases in wages can catch up. But there is a positive side to higher interest rates, and that’s in your savings account.
“At the same time that interest rate increases make it more expensive to borrow things, interest rates also create really great incentives for us all to do what Ben Franklin and our moms and dads told us to do, which is save today, because a penny saved is a penny plus interest that you’ve got in the future to buy other things,” said Claar.
The July meeting is the Fed’s last one before its summer break. The official announcement of the board’s decision will be released Wednesday.