Federal Reserve Hikes Funds Rate to 17-Year High

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Federal Reserve
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For the 10th time in a little over a year, the Federal Reserve voted on May 3 to raise its target range for the federal funds rate.

The increase of 25 basis points (0.25 of a percentage point) is as small as these hikes get. But it makes the target range — now 5% to 5.25% — the highest it’s been since 2006.

Why the change?

The goal of the May 3 rate hike is the same as for the prior nine hikes: Bring down inflation.

The Federal Reserve, which is the nation’s central bank, is aiming for inflation to hover around 2% in the long run. Currently, the annual inflation rate is 5% — down from a high of 9.1% in June 2022 but still well above the Fed’s goal.

As the Fed said in a statement about its May 3 decision:

“The Committee is strongly committed to returning inflation to its 2 percent objective.”

What does it mean?

The federal funds rate is the rate that banks charge other banks for short-term loans.

When it’s rising, financial institutions tend to charge more interest on many types of loans and pay more interest on customers’ savings.

So a rising federal funds rate is bad news for folks with most types of debt because it means borrowing money will only become more expensive in the months ahead. (We get into the nitty-gritty of this in “6 Things That Are Getting More Expensive Amid Fed Rate Hikes.”)

Remember, the Fed’s goal is to lower inflation, which it does by slowing economic activity. And when borrowing money is more expensive, consumers tend to do less borrowing and thus less buying. That in turn tends to slow economic growth and lower demand — conditions that are conducive to easing inflation.

But a rising federal funds rate is good news for folks with savings because it means bank rates are likely to continue inching up in the months ahead.

Already the national average rate on savings accounts jumped six-fold, from 0.06% in January 2022 to 0.39% as of April 2023 — although you can easily earn 10 times that much or more at the most competitive banks.

Even the return on interest checking accounts edged up from 0.03% to 0.06% during that period.

So if you haven’t shopped around lately to make sure you’re getting the highest return possible at the bank, now is a good time to take a look at what other institutions are offering.

Or, for a higher return than you are likely to find on savings accounts, look into money market mutual funds — which are Money Talks News founder Stacy Johnson’s favorite place to stash cash that isn’t invested in stocks.

As he recently wrote of money market mutual funds:

“They’re low-risk, pay whatever short-term rates allow and keep cash readily available.”

What happens next?

The next meeting of the Federal Reserve committee that controls the target range for the federal funds rate, known as the Federal Open Market Committee (FOMC), is June 13-14. That means June 14 is the next opportunity for the committee to vote to change the target range.