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The Daily Economy

A glass savings jar of coins on a kitchen table beside a calculator and a receipt

The Fed held rates. Is your money really growing?

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By The Daily Economy editorial team

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The Federal Reserve left interest rates unchanged this week, but with inflation still at 3.7%, the rate your savings earn on paper is not the whole story. Here is how “real” interest rates work, and how to check whether your money is actually growing.

Key takeaways

  • On October 28 the Fed held its benchmark rate at 3.75%–4.00%. Two policymakers wanted a hike, and markets now expect one in December.
  • The real interest rate is roughly the rate you earn minus inflation. It tells you whether your purchasing power is rising or falling.
  • With consumer prices up 3.7% over the past year, savings earning less than that are losing ground, even though the balance keeps going up.

The news in brief

The Federal Open Market Committee, the Fed’s rate-setting group, kept the federal funds target range at 3.75% to 4.00% after its meeting on October 27–28. In its statement, the committee said economic activity is “expanding at a strong pace” and that inflation “remains elevated.” The vote was 10–2: Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented, both preferring a quarter-point increase.

The hold follows a quarter-point hike in September, the Fed’s first increase since July 2023. Fox Business reported that, according to CME FedWatch, futures markets put the probability of another quarter-point hike at the December 8–9 meeting at about 83% after the decision. At his press conference, Chair Kevin Warsh said the Fed’s target remains 2% inflation as measured by the PCE price index.

The latest consumer price figures explain the pressure. The Bureau of Labor Statistics reported on October 14 that the Consumer Price Index rose 3.7% in the 12 months to September, driven largely by gasoline. (We broke that down in headline vs core inflation.)

The basic idea, explained

Every interest rate you see advertised, whether on a savings account, a CD or a loan, is a nominal rate. It tells you how many more dollars you will have, or owe, after a year. What it does not tell you is what those dollars will buy.

That is where the real interest rate comes in. A quick way to estimate it is:

Real interest rate ≈ nominal interest rate − inflation rate

Here is an analogy. Imagine walking up a down escalator. Your walking speed is the nominal rate. The escalator moving the other way is inflation. Your real progress is the difference. Walk faster than the escalator and you climb. Walk at the same speed and you stay put. Walk slower and you drift downward, even though your legs are moving the whole time.

Central banks think in real terms too. The midpoint of the Fed’s range is about 3.9%. With consumer inflation at 3.7%, the real policy rate is only slightly above zero on that measure. A real rate close to zero does little to cool demand, which helps explain why some officials argued for raising rates again. Raising the nominal rate is how a central bank pushes the real rate up, making borrowing more expensive and saving more rewarding. (For how a hike flows through to mortgages and savings, see what the Fed’s rate hike means for your mortgage and savings.)

The same logic works for borrowers in reverse. If you hold a fixed-rate loan at 3% while inflation runs at 3.7%, the real cost of that debt is slightly negative: you repay it with dollars that buy less than the ones you borrowed.

A worked example

Take $10,000 in savings and compare two hypothetical accounts over one year, assuming inflation stays at September’s 3.7%. The interest rates below are illustrative, not quotes from any bank.

Account A (4.0% APY)Account B (0.5% APY)
Balance after 1 year$10,400.00$10,050.00
Value in today’s dollars (÷ 1.037)$10,028.93$9,691.42
Change in purchasing power+$28.93−$308.58
Approximate real rate+0.3%−3.2%

The math: to turn next year’s dollars into today’s dollars, divide by 1 plus inflation. For Account A, $10,400 ÷ 1.037 = $10,028.93. The balance rose by $400, but its buying power rose by only about $29. For Account B, $10,050 ÷ 1.037 = $9,691.42. The statement shows a $50 gain, yet the money buys about $309 less than it did a year ago.

Stretch it to five years, assuming both rates and inflation stay unchanged (in reality they will move). Account A grows to $10,000 × 1.045 = $12,166.53. Prices rise by 1.0375 ≈ 1.199, so that balance is worth about $10,145 in today’s money. Account B grows to $10,252.51, worth only about $8,549 in today’s money: a loss of roughly 15% of purchasing power while the balance appeared to rise.

Note that the quick subtraction (4.0% − 3.7% = 0.3%) and the exact division give nearly the same answer when rates are low. The gap only becomes noticeable when inflation is high.

What you can do

This is general information, not financial advice.

  • Find your actual rate. Log in to your bank and look up the APY on each savings or checking account. Many people do not know the number, and it can vary widely between banks.
  • Do the subtraction. Take your APY and subtract the latest inflation figure. If the result is negative, your cash is losing purchasing power each year.
  • Keep the purpose in mind. An emergency fund is there for safety and quick access, so a slightly negative real return can be an acceptable trade-off. Money set aside for goals years away is where real returns matter most.
  • Look at your debts the same way. Compare the rate on each loan or card with inflation. High-rate debt, such as a credit card near 22%, carries a large positive real cost.
  • Watch the next data points. The Fed meets again on December 8–9. If rates rise, savings yields often follow, though banks decide how much and how quickly to pass changes on.

Key terms

  • Nominal interest rate: the stated rate on a loan or deposit, before any adjustment for inflation.
  • Real interest rate: the nominal rate adjusted for inflation; roughly the nominal rate minus the inflation rate.
  • Federal funds rate: the rate banks charge each other for overnight loans, which the Fed steers to influence borrowing costs across the economy.

Sources

Written by The Daily Economy editorial team with AI assistance and checked against the sources above. Read our editorial policy.