The Federal Reserve may be poised to raise interest rates this month—nearly one year after the first interest rate increase following the Great Recession. But if the central bankers at the Fed do decide to raise interest rates at the meeting on December 13 and 14, it probably won’t be by very much. Federal funds rate futures are forecasting a hike of about one-quarter of one percent.

The federal funds rate is the short-term interest rate controlled by the Fed and is currently aimed at a rate from 0.25% to 0.50%. A rate increase could put the new target rate from 0.50% to 0.75%, still low by historic standards.

Though the Federal Reserve controls only very short-term interest rates used by financial institutions, the move has implications across the economy—and may directly affect the interest rate your savings and investments earn and the price you pay to borrow money. Here’s how it works and what you can do.

If you have a savings account or a money market account at a bank, you’ve probably despaired over the incredibly low interest rate your savings have earned since 2008. That’s when the Federal Reserve took drastic steps to try to pull the economy out of a recession by slashing interest rates. With rates at historic lows, the interest paid on deposits fell to record-breaking lows and stayed there.

When the Federal Reserve raises interest rates, however, banks typically follow that by also raising the interest rates paid on customer accounts. That means you will likely see slightly higher rates of interest on certificates of deposit and savings accounts. After many years with interest rates essentially at zero, many savers will be happy with any increase.

What you can do: In general, a rising rate environment is good for savers. Who wouldn’t like to earn a higher rate of interest on their cash? You may be able to take advantage of higher rates by seeking out high-yield CDs or high-yield checking or saving accounts. One thing to beware of is inflation—parking a large sum of money in a relatively low-yielding account for several years could lead to a loss of purchasing power over time.

Savers with a long time until they need to use their money may want to consider looking for higher-yielding saving options or investment products, including stocks and stock mutual funds or ETFs. A large sum of money in a relatively low-yielding account could lose purchasing power to inflation over time. But remember, there are tradeoffs. To get higher yields you may need to sacrifice liquidity (the ability to quickly access your money) or accept higher potential volatility (greater swings, higher or lower, in the value of your account).

Source:  Fidelity Investments