This Economic News Could Be Good for Your Savings Account — and Your Paycheck

One of the biggest questions on the minds of investors is: “When will the Fed cut interest rates?” If the Fed cuts interest rates, it could be good news for the stock market, for small business owners, and for anyone who needs to borrow money to buy a house or car. But the latest economic data is suggesting that the Fed might not cut interest rates anytime soon.

According to new survey data from the Bureau of Labor Statistics released on April 30, 2024, during the first quarter (January-March) of 2024, Americans earned slightly higher wages than expected — civilian workers’ compensation costs increased by 1.2%. When people are making more money on the job, that’s good news for those workers’ bank accounts — but bad news for anyone who’s hoping for interest rate cuts.

Let’s look at a few reasons why interest rates staying higher for longer could be good news for your paycheck and your savings account.

Despite stubborn inflation, the job market is strong

After many years of near-zero interest rates following the Great Recession of 2008, the Federal Reserve aggressively raised interest rates during 2022 to fight high inflation after the pandemic. Although inflation has come down since its 2022 highs, it’s still not as low as the Fed wants it to be — at the Fed’s target of 2% annual inflation.

Usually when the Fed hikes interest rates, this leads to higher unemployment. When companies and consumers have to pay more to borrow money, this leads to a reduction in the money supply. Less money to go around means less hiring, less investment by businesses, slower job growth, and more people filing for unemployment. However, the U.S. economy is currently doing something that doesn’t line up with traditional economic theories: Inflation has come down, but unemployment has not gone up.

As of April 2024, the unemployment rate was only 3.9%. Almost everyone in America who wants a job can get a job. It’s true that many people are still struggling with higher prices on everything from groceries to car insurance. But the fact that wages are still rising — higher than expected — is another sign that the job market is strong, and there is strong demand for people’s labor and talents. Even if interest rates stay high, there are optimistic signs that the economy can keep performing well and many people can get extra money in their paychecks.

If interest rates stay at 5%, that’s good news for savings accounts

If the economy is “too good” for the Fed to cut interest rates, what does that mean for your savings account? In the short run, higher interest rates are good news for savers. The best savings accounts and money market accounts are currently paying 5.00% APY (or higher), in line with the effective federal funds rate of 5.25-5.50%.

New inflation data, job market data, and economic data is constantly coming out. Investors, bank executives, and Wall Street experts are always trying to read the latest economic tea leaves to see what moves the Fed might make next on interest rates. The situation could change suddenly — for example, there might be a new economic crisis, companies might announce big layoffs, or there could be other ominous signs emerging of an economic slowdown. These types of changes could make the Fed want to cut interest rates sooner.

But as of this writing (May 9, 2024), the broad consensus seems to be that the Fed is not going to cut interest rates anytime soon. Your savings account could keep earning 5.00% APY until the Fed says otherwise.

Bottom line

The current U.S. economy is bogged down by slightly higher inflation than anyone wants, but it’s also delivering lots of jobs and bigger paychecks. People might be hoping for lower interest rates in 2024, so their borrowing costs go down. But if inflation stays a little “too high,” the Fed will likely leave interest rates at their current level.

And 5% (or higher) interest rates could also be good news for your personal finances. If unemployment stays low, job growth stays strong, your wages keep rising higher than the cost of living, and your savings account is still earning 5.00% APY or higher, those are reasons to celebrate.

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