NY Times on Fed Rate Increase
The New York Times writes "What a Federal Reserve Rate Increase Means for You." The article states, "By increasing its benchmark rate a quarter of a point on Wednesday, the Federal Reserve is trying to rein in inflation, which is at a 40-year high. The mechanics are relatively straightforward: By raising its federal funds rate -- the rate banks charge one another for overnight loans -- the Fed sets off a domino effect. Whether directly or indirectly, a number of borrowing costs for consumers go up. In theory, this slows demand for goods and taps the brakes on inflation. The rate increase was the first bump in the benchmark rate since the pandemic gripped the world in March 2020 and pushed the rate to near zero." It explains, "Many people stashed extra money in their bank accounts over the past couple of years, but whether rate increases translate into a more attractive yield depends on the type of account you have and the institution you’re doing business with. An increase in the Fed benchmark often means banks will pay more interest on deposits -- but not necessarily right away. Banks tend to raise rates when they want to bring more money in, but the largest banks already have plenty of deposits. That gives them little incentive to pay depositors more. Smaller banks and online banks tend to pay better rates more quickly than larger institutions, according to Ken Tumin, founder of DepositAccounts.com, part of LendingTree. And some of them, particularly the savings arms of credit-card banks including Capital One and American Express, have already begun increasing their rates a bit, he added." The Times piece adds, "But overall, rates remain quite low. The average online savings account was paying just 0.49 percent in March, according to DepositAccounts.com; the average was 0.48 a year ago. At brick-and-mortar banks, the average savings account paid 0.12 percent in March, down slightly from 0.15 the year prior. Certificates of deposit, which tend to track similarly dated Treasury securities, have already begun to move a bit higher, particularly among online banks: The average one-year C.D. at online banks is 0.67 percent in March, up from 0.51 percent in January, while the average five-year C.D. is 1.08 percent, up from 0.86 percent in January. Most money market mutual funds, which tend to hold lower-risk investments like short-term government securities, are also expected to rise, albeit from a rock-bottom rate. Most money market fund yields are below 0.02 percent. 'They usually respond fairly quickly to changes in the federal funds rate,' Mr. Tumin said."
