Don’t Let the Rate Hike Scare You

On Wednesday, May 3rd, the Fed hiked interest rates to a target between 5% and 5.25%, the highest since 2007.

And those last 4 words queued up a ton of speculation about recession fears; most of them incorporated this graph in some capacity.

Source: CNBC, Federal Reserve Bank of New York

On a surface level, yes, it’s a bit unnerving to see any financial metric reach 2007 levels. But we’re not in the business of predicting recessions; we’re only concerned with helping you succeed in any financial environment. 

Here’s a bit more on the big picture and how this rate increase changes your personal finance landscape:

Banks also make bets, and sometimes they lose

Setting the similarities to 2007 aside, there’s other reasons people are concerned about rate hikes.

Chief among them, is their role in the recent banking collapses that began with Silicon Valley Bank in March.

We’re not giving out banking lessons, but the main idea is that these banks were betting against rate hikes and didn’t have the proper hedges in place to deal with higher rates.

But unless you’re on the risk management team of one of these banks, or you’re Jerome Powell, in which case please let us know so we can give our marketing team a huge bonus, there’s really not much you can do to change those strategies. 

Instead, here’s something you can do today to take advantage of these rate hikes.

Put your money to work with a high yield account

When the Fed increases interest rates, they’re only directly changing the overnight rate at which banks lend money. But there’s a subsequent spillover effect on any borrowing or savings rates within US banks.

For a broader explanation of how this process works, we recommend checking out NerdWallet’s article on how this rate increase affects savings accounts.

For our purposes though, the main idea will suffice: rate increases tend to improve savings rates. Which makes right now a great time to shop around and find a high yield savings account to maximize the return on your cash.

Last week we released our top picks for high yield accounts; you can find that article here.