Lately we’ve all been watching closely as The Federal Reserve Bank wages its ongoing fight against inflation. And although jobless claims jumped slightly last week, most of the claims were localized to New York and California, and likely weren’t enough to prevent further Fed rate hikes. (Chairman Jerome Powell recently said that rates would have to go higher than originally anticipated since the economy has remained so strong. The markets didn’t like that one bit, btw.)
What Do Higher Rates Mean Long-Term?
To get a sense of what these higher rates may mean for us longer term, we checked in with Greg McBride, chief financial analyst for the personal finance website Bankrate.com.
SUBSCRIBE TO HERMONEY: For more amazing (and free!) tips on managing your money every week, subscribe to HerMoney today
“Higher rates mean more of the same,” McBride says. “Interest rates have been going up for a year now, and they’re not done. So, just as borrowing costs have escalated, the Fed has been raising rates, and there’s still room for more. The flip side of that is for savers: You’re seeing the best returns on savings accounts and certificates of deposit that you’ve seen in 15 years.”
But the key, McBride stressed, is to shop around.
“You have to look in the right place,” he says. Large banks that are flush with deposits have been very stingy with their payouts — and they’re going to continue to be. They don’t need more deposits, so they’re not going to increase their payouts any more than they feel is necessary. But if you’re willing to shop around and make sure your money goes somewhere it will be welcomed with open arms, you’ll see rates on 1 year CDs that are as high as 5%, and rates on high yield savings accounts (HYSAs) as high as 4%.
What Higher Interest Rates Mean For Day-To-Day Banking & Investing
“The beauty is that you don’t have to do anything different about your day-to-day banking,” McBride continues. “All we’re talking about is taking your emergency savings and putting it in something like an online savings account. You can then link that back to the checking account you have at your current bank and easily transfer money back and forth. You keep your same account with the same bank, with the same debit card and the same automatic bill payments. We’re just talking about moving that savings where it’s going to get higher yields.”
On the investment side, McBride says he expects more volatility. “It’s still a question as to whether we’re going to have a recession,” he says, “but if we have one or avoid one, higher interest rates have taken a toll on investors. We’ve seen greater volatility in both stock and bond markets in 2022. And as long as the Fed is raising rates, 2023 will probably not be a great year for either the stock or bond markets.”
A Possible Economic Downturn Looming
When asked if the slowing of the economy is worth the potential risk of job losses, McBride explained it this way: “The high inflation in and of itself will undermine the strong levels of employment we currently see. If we don’t get inflation under control, we run the risk of an economic downturn anyway – and one that could be quite prolonged. In the 1970s, we had a whole decade where inflation was an issue and the economy was in poor shape the whole time. Yes, unemployment is low right now and salaries are going up. The problem is they’re not going up as fast as inflation, and that’s what has to change in order to have sustained economic prosperity. You have to get inflation down so that workers are seeing pay increases that outpace inflation. That’s how an economy grows – when people have additional spending power at their disposal.”
MORE ON HERMONEY:
- This List Will Save You on Tax Prep This Year
- These Two Examples Illustrate the Magic of Compound Interest
- 5 Things To Do After You’ve Paid Off Your Credit Cards
SUBSCRIBE TO HERMONEY: For more amazing (and free!) tips on managing your money every week, subscribe to HerMoney today.
