After last month’s Federal Open Market Committee meeting, the Federal Reserve seemed poised to pause rate hikes. While most experts agree that’s still the likely scenario, some argue the central bank might raise rates for the 11th consecutive time.
Even though inflation has cooled down to 4.9%, we’re still not at the Fed’s target of 2% yet — and some worry cooling on rate hikes could signal that the Fed’s job isn’t done yet.
Whether the Fed does pause on rate hikes or decides to boost 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 that the streak of Fed rate hikes may be over for now. In the upcoming Federal Open Market Committee meeting on June 13 and 14, experts think the Fed won’t raise or lower rates but rather keep the federal funds rate range 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 a little time to see if the cumulative impact of rate hikes to date will do the trick,” said Tom Graff, head of investments at Facet. There’s still the possibility of more rate hikes down the road, though, he added — which means high-yield savings and CD rates will remain elevated for at least a few more months.
But elevated doesn’t quite mean that you’ll continue to see big interest rate increases in your savings and CD accounts. Instead, experts expect rates to remain the same — and some banks may even start lowering rates slightly.
“It’s unlikely that savings interest rates will change significantly,” said Baruch Silvermann, a banking expert and CEO of The Smart Investor. “Recent indicators suggest that interest rates will remain stable for a long time, at least a year. So, if you’re looking to invest for the short term, it may be a wise move to consider putting your money into CDs at the moment.”
Some short-term CDs are over 5.00% APY right now, which can yield a decent return on your savings if you don’t need to touch the money for six months to a year. And even though long-term CD rates are slightly lower than short-term CDs, experts don’t expect rates to go much higher. So, if you’re focused on long-term goals, now’s the time to lock in a long-term CD, because rates may start decreasing within the next year, said Dr. Jovan Jackson, a registered investment advisor for Good News Financial Services & Investment Advisors.
If you need more flexibility to withdraw and deposit cash, high-yield savings accounts offer over 4.00% APY right now and aren’t expected to drop significantly any time soon. But don’t expect big increases in your rate, either.
But there’s a good chance that interest rates are at or near the peak they will hit for this cycle, said Graff. “They could go somewhat higher, but if you’ve been waiting on making certain decisions until interest rates rise, I wouldn’t wait much longer,” said Graff.
What if another Fed rate hike is coming?
Although a rate hike pause is expected, there’s still a chance that the Fed will raise rates again.
“I expect a 25 bps [basic point] increase,” said Jay Srivatsa, CEO of Future Wealth. “The Fed has no choice, and the risk of inflation surging back is too great.” If the central bank does raise the federal funds rate again, borrowing and savings rates will go up again — making financing more expensive, but potentially offering a slightly higher return on your savings.
Regardless of whether the Fed raises rates or not, savings and CD rates won’t change much. “Recent indicators suggest that interest rates will remain stable for a long time, at least a year,” said Silvermann.
There’s still a chance for a recession. Here’s how to prepare
Experts say that regardless of the Fed’s next move, further economic downturn is still likely — particularly if inflation drops closer to the Fed’s target of 2.00%.
“There’s definitely still a chance for a recession, but instead of a traditional recession, we could bounce along with choppy and barely positive growth in the markets, always seemingly one catastrophe away from a disaster,” said Jackson.
Even though inflation slowed in March and reached below 5.00% in April, there’s still volatility, which is common when the economy is nearing a turning point such as a recession. “The economy never moves in a straight line anywhere,” said Graff.
Experts expect economic uncertainty in the near future, and recommend preparing by stocking up your emergency fund and paying down high-interest debt. That’s where savings and CDs with high interest rates can help. The guaranteed return can be beneficial if we’re heading into a recession, said Srivatsa.
If you have savings not collecting interest — or earning as much as it could — opting for a high-yield savings account can help you earn more. And if your emergency fund is already established, you can move excess funds into a CD to lock in a competitive rate while interest is high.