May Fed update: Consumers should look beyond Fed for higher bank rates
Given recent economic developments, it came as no surprise that the Federal Reserve declined to raise interest rates at its early-May meeting. What should be of even more concern to consumers is the disconnect between Fed actions and bank rates.
After all, the Fed raised rates in December 2016 and again in March with no tangible effect on bank rates. So, even though the Fed still talks in terms of making a series of rate hikes over time, consumers should be more focused on what it will take for them to earn more money on their savings accounts.
A triple crown of bad economic news
Even before the Kentucky Derby on May 6, the economy completed a triple crown of discouraging developments. First came a weak employment report, then news that consumer prices had suddenly dropped and finally a GDP estimate that showed anemic growth in the first quarter.
With every meeting, the Fed reiterates its focus on maintaining strong job growth and keeping inflation at around 2 percent. The above series of discouraging reports represented a setback to those goals, making it no surprise that the Fed hesitated to raise rates at its most recent meeting.
How to get the best bank rates while waiting for next rate hike
Unless economic conditions firm up, the wait for the next Fed rate hike may be longer than anticipated. In addition, there is the troubling thought that a rate hike might not do anything to help savings accounts, given the recent disconnect between Fed policy decisions and bank rates.
Under the circumstances, here are two things deposit customers should consider in an effort to earn higher rates:
1. Aim for long term CD rates
Long term CD rates are significantly higher than savings account rates and money market rates. The trade-off is that you have to lock your money up for a specified period. This may not be an option if you are sure to need the money in the near future, but otherwise it might be worth committing to a long term CD.
This is an especially good strategy if you can find one with a relatively low early-withdrawal penalty, such as three to six months worth of interest. In that case, you might be able to sign up for a 5 year CD, and even if you have to break into it after just one year, the extra interest you have earned should more than pay for the penalty.
2. Shop around for the best savings accounts and rates
In the most recent MoneyRates.com America's Best Rates survey, savings account rates ranged from 0.01 percent to 1.10 percent. That may not look like a huge difference, but one way to think about it is that some bank customers are earning 110 times more interest than others. Shopping around for the highest savings account rates will help make sure you are not on the short end of that differential.
The Fed has been slow to raise interest rates, and banks have been even slower. This calls for deposit customers to take matters into their own hands.
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