Fed Funds Rate Raised by 75 bps to a 2.25%-2.50% Target; Savings Rates Should Get Sweeter

To absolutely nobody’s surprise, the Federal Reserve has voted unanimously to raise the Fed Funds rate by 75 basis points today, setting a Fed Funds rate target of 2.25% to 2.50%. The move follows a similar 75 basis point increase six weeks ago and is the Fed’s fourth move since beginning the year at a 0-0.25% target.

We’re still suffering from a Fed that held rates at zero for too long in the aftermath of the pandemic and then has moved too late and too slowly to address the inflationary pressures caused by Putin’s invasion of Ukraine.

While this will be the Fed’s last move until September, the Fed Funds rate is still likely to be at least one percent higher than where it is right now at the end of the year as the Fed tries to play catch up.

Savings and money market accounts will probably move up toward the new Fed target, although some well-known online banks are flush with deposits and are not moving aggressively. We have seen banks stall out, such as Purepoint which is still at 0.40% APY, in spite of having been one of the most aggressive competitors for your online deposits just three years ago! For this reason, it is important to regularly compare your online savings rate with the best rates here.

We’ve seen a lot of skepticism about savings accounts and the value of getting 2% on your money while inflation is burning at 9% plus. The difficulty in maintaining purchasing power parity underscores the insidious nature of inflation, and how important it is for the Fed to move still more aggressively to get it under control. And, while you may be losing purchasing power, a guaranteed 2% is a whole lot sweeter than anything we’ve seen for a while. It is well worth reaching for, especially in a bubbly environment where asset prices in the US are still stretched.