Interest Rates Rise Once Again

Following weeks of speculation and a pause in June, the Federal Reserve made official on Wednesday what many experts predicted — interest rates are heading up yet again.

The current benchmark rate of 5% to 5.25% will now be in the range of 5.25% to 5.50%. 

"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run," the Fed said when announcing the increase. "In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5-1/4 to 5-1/2 percent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

While an increase in interest rates is yet more poor news for borrowers, there is a silver lining for savers. Specifically, the interest rates on high-yield savings and certificates of deposit (CD) accounts are exponentially higher than they had been — and will be heading upward again in light of Wednesday's news.

Who can benefit from an increase in interest rates?

While higher rates make everything from mortgages to credit cards to personal loans more expensive, they also significantly raise the appeal of traditional savings vehicles. If you want to benefit from today's high rates — the highest they've been in 22 years — then consider doing the following now:

Open a high-yield savings account

Interest rates on high-yield savings accounts are many times higher than what can be secured with a regular savings account, and they're likely to go even higher following Wednesday's rate bump. Rates for regular savings accounts are currently at 0.42%, according to the FDIC, but rates on high-yield accounts are about 4% to 5%, approximately. There are multiple high-yield accounts savers can explore right now that earn more than 4.5%. And that's at the prevailing rate. Some experts expect those to tick up even higher now, making this an opportune time to open a high-yield account.

Open a CD

Like their high-yield savings counterparts, CD accounts are also attractive in today's high rate environment. In fact, if you shop around and do your research you could potentially find a CD that has a higher rate than any available savings account.

That said, CDs operate differently than high-yield savings accounts do. For starters, savers will need to lock their money away for the duration of the CD term or risk having to pay a penalty to withdraw it early. On the other hand, rates on CDs are locked, meaning that any Fed activity later in the year won't matter, as the interest rate on your CD will remain the same until it expires. This is especially important in today's climate, as most experts expect future rate hikes to be minimal while others expect a slight drop later in the year or in 2024.

For now, however, CDs are a safe and smart way to benefit from high interest rates. Whether you open a short-term or long-term CD won't matter as much; just opening one at all can help stem the losses being felt in other parts of the economy.

The bottom line

With most experts predicting an end to significant interest rate hikes, now may be the time to act. The interest environment is unpredictable and rates may not be this high again for years. Accordingly, those looking to benefit should strongly consider opening a high-yield savings account, a CD or both. By moving money into one or both of these accounts savers can start earning more interest for very little effort.