The Safe Way to Profit From Fed Rate Hikes

The Safe Way to Profit From Fed Rate Hikes

The ins and outs of America’s central banking system might be complicated. But for consumers, the Federal Reserve’s rate hikes are pretty simple.

The impact of the Fed raising its benchmark federal funds rate — which it did most recently on June 14 — falls on a consumer’s debts and savings.

If you have debts, a Fed rate hike is generally bad news because it tends to increase borrowing costs. We break this down in “Five Ways the Fed Rate Hike Will Impact You.”

If you have savings, a Fed rate hike is good news. That’s because it tends to increase returns on savings. In other words, consumers with savings can profit off a hike.

A safer way to make more money off your savings

If you can stomach some risk and won’t need your savings anytime soon — at least five to 10 years — the stock market generally offers the highest returns. But if your savings are a financial safety net you might need unexpectedly, an insured savings vehicle is best.

That means a saving account, money market account or certificate of deposit (CD) at a Federal Deposit Insurance Corporation-insured bank. You can search for insured institutions using the FDIC’s BankFind tool.

There are a growing number of high-yield savings accounts and money market accounts available. Case in point: “This Bank Now Pays Even More Interest on Your Savings.” And CBS MoneyWatch reports that interest rates for CDs are finally starting to rise as well, with online banks taking the lead:

“In the last six months, several [internet banks] have been increasing their CD rates. Also, new internet banks are launching with top CD rates in an attempt [to] grab market share away from the big players. This competition has resulted in CD rates reaching highs not seen in years.”

The pros and cons of certificates of deposit

CD rates are now as high as 2.35 percent, according to CBS. For example, CBS says the best rate for a:

  • One-year CD is 1.48 percent APY — available at M.Y. Safra Bank with a $5,000 minimum opening deposit
  • Two-year CD is 1.71 percent APY — at First Internet Bank with a $1,000 minimum
  • Three-year CD is 2 percent APY — at Salem Five Direct with a $10,000 minimum
  • Four-year CD is 2.05 percent APY — at M.Y. Safra Bank with a $5,000 minimum and Northern Bank Direct with a $500 minimum
  • Five-year CD is 2.35 percent APY — at Popular Direct with $10,000 minimum and Synchrony Bank with a $25,000 minimum

APY, short for “annual percentage yield,” is how much you will earn on your savings from interest, including compounded interest. You should compare APYs when shopping for CDs, savings accounts and money market accounts.

While CDs tend to offer higher APYs than savings and money market accounts, they are also more likely to come with fees for withdrawing your money early. This is a potential downside of CDs to consider when shopping for a high-yield savings vehicle, particularly because more Fed rate hikes are expected.

Money Talks News founder Stacy Johnson has advised against long-term CDs. In 2011, after three years without one Federal Reserve rate hike, Stacy wrote in “3 Places NOT to Put Money Now”:

“If rates do begin to rise, the last thing you want is have all your money locked up in a long-term certificate of deposit that doesn’t allow you to take advantage of higher yields.”

This is not to say you must entirely avoid longer-term CDs, which tend to have the highest APYs. Just don’t put all your short-term savings into one. Stacy continues:

“… there’s nothing wrong with spreading your savings around in various maturities, like money market accounts, short-term, and longer-term CDs. Then you’re prepared no matter what happens to rates. If they rise, your money market immediately pays more. If they fall, you’ve got a higher rate locked in with long-term CDs.”

For ways to make more bank on your savings as the Fed continues to hike rates, check out “8 Ways to Earn More on Your Savings.”

How do you plan to respond to the increasing number of Federal Reserve rate hikes? Share your thoughts below or on our Facebook page.

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