June Fed Rate Hike: What It Means for Your CDs

Federal Reserve rate hikes, such as Wednesday's one-quarter percentage point increase, often lead to higher annual percentage yields on certificates of deposit, or CDs.  APYs on long-term CDs at many online

Federal Reserve rate hikes, such as Wednesday's one-quarter percentage point increase, often lead to higher annual percentage yields on certificates of deposit, or CDs.  APYs on long-term CDs at many online banks are approaching 3% after the Fed's last few hikes.

If you own a CD " often called a share certificate  by  credit unions " here's a look at what the most recent rate increase means for your savings.

» For the essentials,  see our  rate hike Q&ASeek out  higher rates

CDs are a great tool for growing  savings over a set time period. The longer a CD's term, the higher the rate; most financial institutions offer terms of up to five years. In recent years, CDs with five-year terms have had average APYs  well below 1%. But after the last few Fed rate hikes, a number of online banks and credit unions are now offering CDs with yields near the 3% mark.

Although Fed rate hikes don't cause bank rates to skyrocket overnight, they can  encourage financial institutions to gradually increase their APYs. Why? Banks want to remain competitive and attract potential customers. If a few of your bank's competitors  start increasing  rates, yours will likely  feel pressure to do the same.

You'll pay  an early-withdrawal fee if you close a CD before the end of its term, also known as its maturity date,  and move the money to another institution with better rates. The penalties you'll incur might nullify any gains. You could, however, open a new CD at another financial institution.

» For top deposit account rates plus better access to your funds, read up on building a CD ladderAsk for your bump up if rates increase

Some financial institutions offer bump-up CDs, which let you  request a rate increase if your  bank's rates go up. In most cases, you  can exercise this option only once during the term of your  certificate. These types of CDs  typically have lower interest rates than fixed-rate certificates, and many carry steeper minimum deposit requirements.

Another option: step-up certificates

If you want a savings product that functions much like a bump-up CD but with more predictable rate increases, consider a step-up CD. These have interest rates that  automatically increase at specific intervals. With a 28-month step-up CD, for example, you might start with a low APY, but your  rate will rise  every seven months.

Again, initial interest rates on these products tend to be low, and some of these CDs and share certificates are 'callable.' That means you might never see the rate boost because the issuer might redeem yours  before it matures.

Watch CD  rates

CDs can be a great way to set aside money for the future.  And although  each individual Fed rate hike might not lead to dramatic changes, it's still a good idea to monitor your bank or credit union's response and compare it with those  of other banks and credit unions.

 

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Tony Armstrong is a writer at NerdWallet. Email: tony@nerdwallet.com. Twitter: @tonystrongarm.

The article June Fed Rate Hike: What It Means for Your CDs originally appeared on NerdWallet.