fed rate increase probably won’t boost your savings account anytime soon
Last Updated : GMT 06:49:16
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Arab Today, arab today
Last Updated : GMT 06:49:16
Arab Today, arab today

Fed rate increase probably won’t boost your savings account anytime soon

Arab Today, arab today

Arab Today, arab today Fed rate increase probably won’t boost your savings account anytime soon

Janet Yellen, chair of the US Federal Reserve, speaks during a news conference following a
Washington- Arab today

The Federal Reserve’s decision to raise its benchmark interest rate by 0.25 percentage points on Wednesday marks the third such rate increase since the end of the financial crisis.

You’ve probably seen the increases affect the rates for credit cards, home equity lines of credit and other loans. But it may be a while before the Fed’s rate increases start to make a difference in one key area of your finances: your savings account.

“People need to get used to the idea of [saving account] rates being low,” says Alan MacEachin, a corporate economist at Navy Federal Credit Union.

In the past, Fed rate increases have meant better yields on savings accounts. The higher rates make it possible for banks and credit unions to charge more for loans, leaving them with more revenue that can be passed on to consumers in the form of higher yields on savings accounts.

But after the financial crisis, which made many consumers more nervous about investing or spending money, many financial institutions are already so flush with cash that they don’t have much of a motivation to bump up the yields on savings accounts, says Sean McQuay, a credit and banking expert with the personal finance website NerdWallet. Although some firms have started to pass those higher rates on to savers, the Fed may have to raise rates a few more times before better yields on savings accounts become the norm, McQuay says

Higher rates on credit and loans

Yields on savings vehicles, such as money market accounts, CDs and traditional savings accounts, have stayed relatively flat since December 2015, when the Fed first began raising interest rates after the crisis. As of last Wednesday, the average yield on money market accounts was 0.11 per cent, unchanged from 0.10 in December 2015, according to the bank comparison website Bankrate.com.

In contrast, consumers are being squeezed by higher rates on credit and other variable loans, which are affected directly by a Fed rate increase. For example, average credit card rates increased to 16.26 per cent last week from 15.77 per cent in early December 2015, according to Bankrate.com. The average rates for home equity lines of credit, which are also directly affected by the Fed, have increased to 5.15 per cent from 4.75 per cent in that same time period.

Even after more banks start to offer higher savings rates, we are “light years” away from seeing the generous yields of 5, 6 or 7 per cent on five-year CDs that were common during the 1980s and 1990s, says Greg McBride, chief financial analyst for Bankrate.com. “It’s going to be a long, tough slog,” he says, adding that the Fed is expected to move slowly.

Until then, people saving for major financial goals will generally need to save more, or wait longer, to make up for the lower yields.

Retirement

Some consumers may need to invest in stocks and bonds — and face more risks — if they want to earn higher returns, says Clinton Key, a research officer for Pew Charitable Trusts. That may not be a problem for people saving for long-term goals, such as retirement, and who have plenty of time to recover from any losses.

But some people in or near retirement, as well as those saving for a near-term goal, such as a down payment for a home they want to buy within five years, may not be able to take that kind of risk, Key says.

If you don’t want to take that risk, it may be smart to shop around with community banks, credit unions and online savings accounts to get the best yields for a savings account, McQuay says. For example, some online banks can offer savings yields close to 1 per cent, compared to the typical yield of 0.01 per cent offered on savings accounts from traditional banks, he says

source : gulfnews

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