Fed Rate Decision Means Consumers Have A Choice

The latest Fed meeting left the fed-funds-rate target unchanged at 1.50 to 1.75%, but consumer rates can move independently. Consider these choices when saving and borrowing.
By Richard Barrington
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fed-update-articleFEDERAL-FUNDS-RATE TARGET: 1.50 to 1.75%

As expected, the Federal Reserve announced on January 29 that it left the federal funds rate unchanged.

Despite the firm grip the Fed has on its interest rate, the rate environment for consumers is far from stable.

When that occurs, it gives savers and borrowers an opportunity to improve their situation. They can earn more on savings and pay less on debt in the year ahead. But if consumers keep the status quo, it can cost them dearly.

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January 29, 2020 FOMC Meeting Announcement Highlights

The Fed left rates unchanged at a target range of 1.5% to 1.75%.

It appears that the recession fears prompting last year's federal-funds-rate cuts have eased enough for the Fed to take a wait-and-see approach toward rates.

Besides short-term interest-rate adjustments, the Fed has been making large purchases of income-oriented securities in recent months. These purchases help lower market interest rates more broadly than routine fed-rate cuts do.

In a press conference following the Fed meeting, Fed chairman Jerome Powell said that he expects these purchases to taper off by the second quarter of 2020. If that actually happens, it would be a sign that the Fed is getting more confident in the economy's ability to grow without further artificial stimulus.

What's Next for the Fed and Interest Rates?

Fed funds rates are much lower than normal on both a nominal and an inflation-adjusted basis.

Despite this, some people continue to call for even lower rates. In the days following the latest Fed announcement, the U.S. Bureau of Economic Analysis will make a couple economic releases that will give early signs of whether further rate cuts would be likely.

These economic releases include an advance estimate on fourth quarter 2019 economic growth and an update on inflation. The Fed has been lowering rates to help growth, but the ability to do this depends on inflation remaining low.

Also, there has been growing concern that the Fed's low interest-rate policies have allowed prices on stocks and bonds to rise much higher than they otherwise would. In other words, low rates may be fueling an investment bubble.

The ever-changing economic situation and the impact of interest rates on the financial markets are reminders of how many things the Fed has to consider in making rate decisions. The upcoming data on the economy will weigh heavily on how long the Fed can keep rates as low as they are.

With Interest Rates on the Move, What Can You Do?

Consumers are affected by interest rates in a number of ways. Rates on savings accounts, CDs, credit cards, mortgages and personal loans are all impacted by many of the same forces that drive the Fed's decisions.

However, those consumer interest rates are not directly controlled by the Fed. Notably, bank rates started falling before the Fed's first rate cut last year - and they continued to fall even after the final cut.

You might see the rates you earn on savings or pay for borrowing continue to change in the weeks and months ahead. Here are some strategies to consider in this changing environment:

  1. Don't accept low interest rates on your savings

    Interest rates on savings accounts, money market accounts and CDs ended 2019 lower than they began the year. So unless something changes, you will earn less on your savings this year than last.

    However, most bank customers could raise their rates by well over 1% by shopping around. This could allow you to raise the rate you earn while most other people are living with sub-par rates.

  2. Lock in today's CD rates

    If you are concerned about bank rates continuing to drift lower, consider locking in today's rates with a long-term CD. Just be sure you can afford to leave that money alone for the full term of the CD. If you are not sure about the timing of your financial needs, consider a no-penalty CD or a CD ladder as possible alternatives.

  3. This is a good time to borrow - if you think ahead

    Rates on many forms of credit have fallen over the past several months. That makes borrowing look relatively cheap, but getting a low rate isn't the only consideration when you borrow.

    Budget before you borrow to make sure you can repay the loan. Also, consider any upcoming needs or risks to your income that might make it tougher to make those debt payments.

  4. Work to improve your credit

    Recent years saw credit card rates rise much more than most other interest rates. This may reflect growing concerns from credit card companies about the debt they are owed. In part, that concern might stem from the tendency to lend to high-risk consumers later in the economic cycle. In any case, it is a reminder that people with better credit get lower rates, so working to improve your credit score could pay off for you in the long run.

>> Calculator: Know your CD's inflation-adjusted value at maturity

The Fed's interest-rate decisions take into account things like prospects for the job market and inflation. You have your own decisions to make about interest rates, and it would be wise to consider some of those same economic conditions.

Previous Federal Reserve Board Updates articles:

FOMC Date2019 FOMC Meeting Update Articles
12/12/2019December, 2019 - Fed Meeting Hints Rates at a New Normal
10/30/2019October, 2019 - What the Latest Fed-Rate Cut Means to You
09/11/2019September 2019 Fed Meeting: How to Protect Your Money
08/01/2019July 2019 Fed Meeting Raises New Questions
06/20/2019Consumers Not Limited by Fed's Rate Decision
05/2/2019Federal Reserve Pursues Rate Stability
03/21/2019Shifting Stance: Fed Implies No Rate Increases in 2019
01/31/2019Fed's Low Profile Won't Stop Interest Rates from Rising


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