Right now, all eyes are on the Federal Reserve. The next meeting of the Federal Open Market Committee is scheduled for May 2 and 3. The Fed could raise interest rates again or press pause for the first time since March 2022.
At the March FOMC meeting, Jerome Powell made it clear that the Fed was committed to reducing inflation back to the Fed’s 2% target. At the time, there was still work to be done and meeting the target would require “a period of below-trend growth and some softening of labor market conditions.”
Some experts agree that there is still work to do to reduce inflation, so there is a chance we could see another rate hike next week. But with inflation cooling and the unemployment rate holding steady, there’s a chance the Fed will end its rate hike streak.
What does this mean for your savings? We spoke to five experts to see what they think will happen next and how you should prepare.
Read more: The clock is ticking to lock in a long-term CD: Why experts say you shouldn’t wait
Will the Fed raise rates again?
Experts are divided on whether the Fed will raise rates again or hold off on raising rates. But some experts believe the Fed could raise rates one last time in May.
The latest consumer price index report showed inflation rose just 0.1% from February to March, a smaller increase than previous months. But inflation is still high – 5% on an annual basis. Since we are not quite in the Fed’s 2% target range, there is a chance we could see another rate hike, but not as significant as last year’s 50 to 75 basis point increase.
“I believe 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 Done Personal. “That will probably cause the banks to adjust rates higher than where we are today.” While Sprung expects rates to rise a bit more, he doesn’t expect them to surpass the highs we experienced a few weeks ago.
Inflation is the highest it has been in more than 40 years, said Chelsea Ransom-Cooper, managing partner and director of financial planning at Zenith Wealth Partners. And it doesn’t go down as easily as it goes up.
“Inflation goes up like a rocket ship but comes down like a parachute,” Cooper said.
The Federal Reserve Bank has raised the federal funds rate several times since 2022 to fight inflation, signaling how long it may take for the economy and inflation to catch up. She believes it will take some time to reach the target rate of 2%. “The next FOMC meeting in May could be the last rate hike of the year,” she said.
What to expect if the Fed doesn’t raise rates
While some experts believe the job of taming inflation is not done, Powell noted that the US economy slowed significantly at last month’s FOMC meeting.
“We are no longer stating that we expect the current rate hikes to be adequate to suppress inflation; instead, we now expect that some additional robust policies may be appropriate,” Powell said. Based on Powell’s comments, last month’s consumer price index report and signs of cooling inflation, some experts believe the recent string of rate hikes is over for the foreseeable future.
“I hope they’re done recruiting, but I didn’t want them to recruit after the collapse of Silicon Valley Bank, and they did,” said Carrie Carbonaro, a certified financial planner and director of women and wealth at Advisors Capital Management. “We have to wait for the dust to settle from all the fast and furious rate hikes we’ve already had.”
There’s a chance the Fed will do nothing next week, said Ligia Vado, senior economist at the National Credit Union Association. There are several reasons this could happen:
First, banks are under stress from tightening underwriting standards spurred by recent bank failures and other factors, she said. Moreover, there is already a decline in access to credit and loans. “One could argue that the Silicon Valley Bank effect makes a Fed move unnecessary,” Vado said.
If the Federal Reserve doesn’t raise rates, you can expect one of two things to happen: Interest rates will remain stagnant, which can be good if you want more time to choose the right savings account option or continue to earn a decent return on the high yields from a savings account you already have. On the other hand, interest rates may slowly fall, and any variable rate account may see its APY decrease, meaning you’ll be earning less on your savings. In this case, it may be worth considering fixed-rate options, such as a CD, so you can lock in a high rate now.
How to prepare for the Fed’s next move now
“Predicting the outcome of a Fed meeting is always a bit risky, but based on recent trends, we may see the Federal Reserve adjust policy to address concerns about inflation or economic growth,” said Tim Doman, a certified financial planner and CEO from the best mobile banks.
Whichever way the Federal Reserve goes, banks will respond to the Fed’s move by adjusting their rates accordingly, whether they raise rates or hold them steady for a while. Keep an eye on what the Fed says and be prepared to adjust your savings strategy if necessary, Doman said. “Flexibility is key in the current economic environment.”
For now, consider how you plan to allocate your savings to determine the best savings account option. In general, it’s a good idea to focus on building an emergency fund first, then put additional savings into accounts that can earn better interest rates, such as CDs. A fully liquid savings option, such as a high-yield savings or money market account, gives you access to your money in case you experience an unexpected expense, face a layoff, or find that rising prices are cutting into your paycheck even more.
Once you’ve covered emergencies, a CD is another option worth exploring. Most CD terms offer over 4.00% APY right now, even for shorter terms. Just make sure you won’t need the money before the term expires – otherwise you’ll face early withdrawal fees. And if you want more flexibility but also like the idea of a fixed interest rate, you could build a CD ladder instead—investing in CDs that mature at different times to give you easier access to your money.
If you have high-interest debt, such as credit card balances, you’ll want to focus on paying off those bills. As the Federal Reserve raised interest rates, savings rates rose, but so did the cost of borrowing — making your credit card balance even more expensive. If you can figure out a repayment plan, focus on putting as much as you can into high-interest debt each month while putting some money aside for savings. If you’re paying too much interest to reduce your debt, consider a balance transfer credit card or a debt consolidation loan. A balance transfer card can offer 12 to 18 months to address your debt interest-free, while a debt consolidation loan typically has lower credit requirements, a lower interest rate than credit cards and can help stretch out payments you for several years.
Whether your goal is to save more or eliminate credit card debt, now is the time to act. Experts agree that the tipping point for interest rates is coming soon, so you’ll want to take advantage of high interest rates to boost your savings. And with interest rates expected to remain high for the foreseeable future, it’s also critical to pay off high-interest credit card debt sooner rather than later.