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The May inflation report, released today, offers some hope to the millions of Americans who are tired of rising prices. Although the drop was slight, the report shows that the inflation rate fell month-on-month, 3.4% in April to 3.3% in May. And, that decline was enough to prompt the Federal Reserve to keep interest rates unchanged at its June meeting.
The Fed has chosen to hold rates frozen between 5.25% and 5.50% for almost a year now to try to fight persistent inflation. Many experts predicted as early as 2024 that the Fed would start reducing rates in the middle of the year, but the improvement in inflation has been slower than expected. In turn, the Fed has kept the expected rate cuts in exchange for a more aggressive strategy.
However, there is always the possibility of changes in rates in the future. For example, the Fed could choose to raise rates if inflation starts to rise again. But if inflation falls substantially over time, the Fed could cut rates overall. With Fed rate hikes on hold for now, what money moves should you make as a result?
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3 Big Money Moves to Make With Fed Rate Hikes Still on Pause
Here are some key money moves you might want to consider making right now:
Open a short-term CD at a high rate
With the Fed rate still stuck at a 23-year high, one move you may want to make is to lock in a high short-term rate. certificate of deposit (CD). After all, the current rate environment has made short-term rates higher than long-term rates in many cases. So, a short-term CD can be a smart way to grow your savings safely in this economy.
For example, many major banks and financial institutions offer short-term CDs with rates that exceed 5.5% currently That's a high rate overall, but it's more than 10 times higher than the average savings account rate, which is currently just 0.45%. So, if you want to maximize your earnings, finding the right short-term CD account makes sense.
And, given that future rate hikes are still on the table, a short-term CD could make sense in other ways, too. For example, most short-term CDs ripens in a matter of monthsso if inflation picks up again in the coming months and the Fed chooses to raise rates in response, you could transfer the funds from your maturing CD to another CD at a higher rate.
So between today's high CD interest rates and the possibility of future rate hikes, opening the right short-term CD account could be a smart move while rates remain on hold.
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Start earning a top rate with a high yield savings account
CDs aren't the only interest-bearing accounts offering the best rates right now. Favorable rates are also offered on certain types of savings accounts, such as high yield savings accounts.
For example, many of today's high-yield savings accounts offer rates that rival Annual Percentage Returns (APY) are offered on CD. It's not uncommon to find high-yield savings accounts with rates above 5% currentlyand in some cases, the returns can be even higher.
With deposit rates so high, putting some of your money into a high-yield savings account now will result in returns that far outpace inflation. Plus, you'll also have access to the funds if you need them, which can be a major advantage compared to CDs, which usually come with penalties for early withdrawal that eat the interest returns.
Pay off expensive variable rate debt
With interest rates staying high across the board, any high rate debt which you carry is costing you a lot of money in interest. So it's a smart time to pay off any outstanding variable rate debt you're dealing with to try and get rid of it sooner.
The average credit card rate, for example, is about 22% currently Rates this high (or higher) make it easy for compound interest to cause your balances to grow out of control. And, if future rate hikes occur, that rate could become even more expensive over time.
But cutting those debt loads won't just save you money in interest. It will also improve your overall financial situation, making it easier and more affordable to borrow money, if you need to, when rates start to fall. So there are numerous benefits to addressing this high-rate debt now that the Fed has again halted rate hikes, and there are numerous options for dealing with credit card debttoo.
The bottom line
While it may make sense to tackle your high-rate debt and consider opening a short-term CD and high-yield savings account right now, it's also important to understand that every situation is different. In turn, you may want to run the numbers and weigh all the factors before making any moves. That way, you can look for the options that make the most sense for you, ensuring you're in a position to meet all of your short- and long-term financial goals.
