Banks Aren't Waiting for Fed Rate Increases
The Fed decided to leave interest rates unchanged in its most recent Open Market Committee meeting on interest rates. That doesn't mean that banks will stand pat, however -- and neither should you.
Federal funds rate direction: upward, but cautious
The Fed announced on August 1, 2018 that it would keep its short-term interest rate unchanged, at a range of 1.75 to 2.00 percent. This is consistent with a pattern that has seen the Fed raise interest rates by a quarter point at every other meeting since December of last year. If the pattern continues, expect a 0.25 percent rate increase from the Fed at its late September meeting.
Though this pattern is subject to change as conditions warrant, the recent trend of raising rates at every other meeting reflects the split intentions the Fed has toward rates right now. Ideally, the Fed would like rates to be higher -- not only do economic growth and inflation warrant it, but the Fed has also signaled its intention to return rates to more normal levels so it will have monetary options when the economy next lapses into recession.
Balanced against this upward rate policy direction is the knowledge that rate increases can be disruptive. That's why, rather than raising rates all at once, the Fed generally prefers incremental changes. Consequently, it is only raising rates by 0.25 percent at a time, and leaving some time between rate increases for the impact to be assimilated by the economy.
Given those conflicting pressures, the Fed has adopted an on-again, off-again course of raising rates. It was the off-again option's turn at the most recent meeting. Unless something changes, expect another rate increase at an upcoming meeting, possibly as early as September.
Credit card and savings account rates up
The Fed might be raising interest rates at a cautious pace, but banks and other financial institutions aren't completely following the Fed's lead. Yes, interest rates for credit cards, savings accounts, money market accounts and CDs have been rising, but they don't seem to be pausing on the way up the way federal funds rate has.
Credit card rates in particular have been rising quickly, with a cumulative increase of 1.93 percent since the end of 2016. While deposit rates have risen more slowly, some banks have picked up the pace of late. The most recent America's Best Rates survey found the average savings account rate rose by just 0.04 percent in the second quarter of 2018, but the top rate in the survey was up by a more robust 0.27 percent.
Next steps for consumers
Unless the economy takes a sudden turn, expect the Fed to continue a course of slow but steady interest rate increases. However, consumers should be aware that, while banks and credit card companies are influenced by the Fed, they are not universally bound to its policies. Some will raise rates more quickly than others.
For consumers, this means the following:
- Credit card holders
Check your credit card rate to see how much it has gone up over the past year or so. If it seems to be rising rapidly, you should shop around for better credit card terms.
Also, rising rates make this an ideal time to work on paying down your account balance to minimize interest charges.
- Bank depositors
With some banks raising rates on CDs, savings and money market accounts more rapidly than others, you should see if your bank is leading the charge or being left behind. The most recent America's Best Rates survey found the top savings account rate to be 1.85 percent.
A changing rate environment creates opportunities for alert shoppers. That means finding credit card companies that are raising rates more slowly than most, and CDs, savings and money market accounts that are raising rates more quickly.
More resources for credit card holders:
Calculator -- Credit card payoff calculator
Calculator -- Should I switch to a lower-interest credit card?
Want to compare credit cards? Read up on different types of credit cards: Credit card essentials
More resources for bank depositors:
Want a consistently competitive bank? Read America's Best Rates survey of the top ten
Shopping for the best CD rates? Use our CD rate finder tool
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