After last month’s Federal Open Market Committee meeting, the Federal Reserve appeared poised to stop raising interest rates. While most experts agree that this is still the likely scenario, some say the central bank could raise rates for the 11th time in a row.
Although inflation has cooled to 4.9%, we’re still short of the Fed’s 2% target — and some cooling of worries about raising interest rates could signal that the Fed’s work isn’t done yet.
Whether the Federal Reserve stops raising interest rates or decides to raise the federal funds rate again, here’s what it means for your wallet, the likelihood of a recession and how you can prepare.
What if the Fed doesn’t raise rates?
Most experts believe the streak of Fed rate hikes may be over for now. At the upcoming Federal Open Market Committee meeting on June 13 and 14, experts believe the Fed will not raise or lower rates, but rather keep the range of the federal funds rate where it is for now – 5.00% to 5.25%.
“Inflation is still too high to be sure, but the Fed probably wants to give it some time to see if the cumulative impact of rate hikes to date will work,” said Tom Graf, chief investment officer at Facet. There’s still room for more rate hikes ahead, he added — meaning high-yield savings and CD rates will remain high for at least a few more months.
But the hikes don’t quite mean you’ll continue to see big interest rate hikes on your savings and CD accounts. Instead, experts expect rates to stay the same – and some banks may even start cutting rates slightly.
“Savings rates are unlikely to change significantly,” said Baruch Silverman, banking expert and CEO of The Smart Investor. “The latest indicators show that interest rates will remain stable for a long time, at least a year. So if you’re looking to invest in the short term, it might be a wise move to consider putting your money into CDs right now.”
Some short-term CDs are over 5.00% APY right now, which can yield a decent return on your savings if you don’t have to touch the money for six months to a year. And although long-term CD rates are slightly lower than short-term CDs, experts don’t expect rates to rise much. So if you’re focused on long-term goals, now is the time to lock in a long-term CD because rates may start to decline next year, said Dr. Jovan Jackson, registered investment advisor for Good News Financial Services & Investment Consultants.
If you need more flexibility to withdraw and deposit money, high-yield savings accounts offer over 4.00% APY right now and aren’t expected to drop much anytime soon. But don’t expect big increases in your rate, either.
But there’s a good chance interest rates are at or near the peak they’ll reach for this cycle, Graf said. “They could go a little bit higher, but if you’ve been waiting to make certain decisions until interest rates go up, I wouldn’t wait much longer,” Graf said.
What if another rate hike is coming from the Fed?
Although a pause in rate hikes is expected, there is still a chance the Fed will raise rates again.
“I expect 25 bps [basic point] increase,” said Jay Srivatsa, CEO of Future Wealth. “The Fed has no choice, and the risk of inflation returning is too great.” If the central bank raises the federal funds rate again, interest rates on loans and savings will rise again – making financing more expensive but potentially offering slightly higher return on your savings.
Whether the Fed raises interest rates or not, interest rates on savings and CDs won’t change much. “Recent indicators suggest that interest rates will remain stable for a long time, at least a year,” Silverman said.
There is still a chance of a recession. Here’s how it’s prepared
Experts say that regardless of the Fed’s next move, a further economic downturn is still likely — especially if inflation falls closer to the Fed’s 2.00% target.
“There’s definitely still a chance of a recession, but instead of a traditional recession, we could bounce back along with patchy and barely positive growth in markets that always seem one crash away from a crash,” Jackson said.
Although inflation slowed in March to below 5.00% in April, there is still volatility that is common when the economy approaches a tipping point, such as a recession. “The economy never moves anywhere in a straight line,” Graff said.
Experts expect economic uncertainty in the near future and recommend preparing by building up your emergency fund and paying off high-interest debt. This is where savings and high interest CDs can help. A guaranteed return could be beneficial if we’re heading into a recession, Srivatsa said.
If you have savings that aren’t earning interest — or earning as much as they could — choosing a high-yield savings account can help you earn more. And if your emergency fund is already built up, you can move excess funds into a CD to lock in a competitive rate while interest rates are high.