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At last week’s Federal Reserve meeting, chair Jerome Powell gave a pretty stark warning:
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“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment.”
Yikes. That combo of inflation, slower growth, and rising unemployment is called stagflation. And that’s not great news for anyone.
Depending on how things unfold, your savings account could either benefit from higher interest rates or take a hit if the economy slides into recession.
Tariffs mean higher prices — and maybe higher rates
When tariffs rise, so do the prices of everyday goods. Think groceries, electronics, clothing — you name it. Higher prices, in turn, boost inflation.
Normally, to fight inflation, the Federal Reserve raises interest rates. Higher rates would help slow down spending, but they also mean you can earn more on savings products like high-yield savings accounts and CDs.
Here’s the short-term upside for savers:
You could lock in higher yields on savings accounts.
Some banks might offer even better high-yield CDs or money market accounts.
Cash becomes a safer, more rewarding place to park money.
But here’s the risk: If inflation runs too hot, it can also squeeze household budgets. Making a few extra dollars in interest means nothing if it’s costing a few hundred more to buy groceries.
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If recession hits, interest rates could fall
Another possible effect of higher tariffs is an economic slowdown. If businesses face higher costs and lower demand, then unemployment may rise. A sharp pullback in consumer spending could push the U.S. into a recession.
If that happened, the Fed would likely slash interest rates to stimulate growth. That would hurt savers in two big ways:
Yields on savings accounts and CDs could plunge.
The stock market could slump, hurting investment portfolios.
So while your cash would still be safe in savings, it might not grow much. And your long-term investments could suffer.
If you can lock in a good savings rate today, you might stay ahead of potential rate cuts for a while. Short-term CDs (12 months or less) are perfect for this.
The nightmare scenario: Stagflation
You’ve probably heard the word tossed around lately — stagflation. It’s that rare and ugly combo of high inflation, slow (or negative) economic growth, and rising unemployment.
If we end up there, it’s trouble — for the economy, for job security, and for everyday savers like me and you.
The Fed would be stuck between two tough choices:
Fight inflation by raising interest rates.
Fight unemployment and weak growth by cutting rates.
It can’t really do both at the same time.
This uncertainty makes it harder for savers to plan. You might be earning more interest for now, but if inflation keeps rising, your money’s buying power shrinks.
Stagflation is basically a lose-lose situation. Nobody wants it — but it’s a real possibility if steep tariffs stick around and the economy stumbles.
Staying prepared
Of course, not every tariff leads to doom and gloom.
There’s a chance the economy threads the needle perfectly: some inflation at first, but eventually, more jobs, stronger growth, and perhaps even lower taxes.
In the meantime, the smartest move is to make sure your cash is still working hard today, no matter what tomorrow brings.
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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Motley Fool Money does not cover all offers on the market. Editorial content from Motley Fool Money is separate from The Motley Fool editorial content and is created by a different analyst team.Joel O’Leary has no position in any of the stocks mentioned. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
