How the Fed Funds Rate Impacts You
Because the Fed funds rate ultimately influences many other market interest rates, a variety of interest rates exist, from the higher car note rate to the rock bottom return on your bank savings account.
Additionally, the Fed funds rate influences the prime rate, the interest rate awarded to bank customers with the best credit, which is tied to various loans and savings account yields. Today, the prime rate is 4.25 percent — the highest level of the year and 3 percent above the fed funds rate. You can estimate the prime rate by adding 3 percent to the fed funds rate.
Since January 2017, the Fed has raised rates three times, bringing the important interest rate to a range of 1.25 and 1.50 percent. The low 4.1-percent unemployment level and continuous growth of wages support this federal funds rate projection. But don’t expect rates to stop there: In her recent speech, current Federal Reserve Board chair Janet Yellen stated the Fed’s goal of reaching a 2-percent inflation target.
Looking forward, next year’s interest-rate forecast includes three quarter-point increases and two increases in both 2019 and 2020. Find out how these interest-rate boosts might affect your finances in 2018.
Retirees and savers are tired of the low-interest rates and are looking forward to the Fed raising interest rates. Despite the modest rate increases this year, the average money market savings account rate remains a paltry 0.11 percent, according to the FDIC.
Fortunately, an interest rate hike should slightly increase savings account rates, according to a recent MarketWatch article. But don’t expect to make a fortune using a savings account as your only growth tool.
For the best rates, you might consider seeking out promotions at online banks, which have lower overhead and can offer higher rates than traditional banks. For example, if you invest $5,000 in a one-year CD at online Ally Bank, you can expect to receive 2.10% APY, which is far superior to the current national CD rate of 0.36 percent. If you deposit more money, you can earn an even higher rate.