Fed Rate Unchanged: What Consumers Should Do
FEDERAL-FUNDS-RATE TARGET: 0.0% to 0.25%
The July 29 announcement by the Federal Open Market Committee (FOMC) that it was leaving the fed interest rate unchanged is not a sign that it believes the economy is on the right course.
Rather, it's a sign of just how tight a policy corner the Fed has painted itself into.
The fact that there is no instant cure for the current recession makes it all the more important for consumers to make the right decisions about their finances at this time.
From earning more interest on savings to reducing fees and loan costs, consumers still have some good moves to make even if the Fed's moves are limited.
Why There Was No Fed Interest Rate Cut
A fed interest rate decision to cut rates is meant to stimulate the economy by reducing borrowing costs. The Fed would typically do this in a recession or to prevent a recession if the economy seemed to be weakening.
Given that the U.S. economy is currently in a very serious recession, why was there no fed rate cut at the latest FOMC meeting?
It's simply because, with rates already near zero, there's no room to cut them any further. This is partly because of something the Fed did right in the past and partly because of something it did wrong.
What the Fed got right; what the Fed got wrong
To the Fed's credit, the FOMC acted decisively in the early days of the U.S. coronavirus outbreak. Back in March, when the outbreak was first gathering steam in the U.S., the Fed made interest rate cuts totaling 1.5%.
The problem was, that put the federal funds rate in a range of from 0 to 0.25%, so there was no further room to cut rates.
That's due to something the Fed appears to have done wrong in the years prior to the current crisis:
- Through most of the longest U.S. economic expansion on record, the Fed kept interest rates at or near recession levels.
If you stay in emergency mode when times are relatively good, you have few options left when things turn bad.
What is the Fed Doing about the Recession?
While the Fed has little room to cut the short-term fed funds rate, it is working to keep long-term rates down by buying Treasury and mortgage-backed securities.
This has supported the housing market by pushing mortgage rates down to historic lows.
Also, the Fed has sought to keep credit flowing by providing capital to lenders. This can help economic activity continue at a time when many businesses would be short of cash.
Supporting lending can also head off a potential chain reaction that could destabilize the financial system. If lenders become too cautious, it could trigger a wave of defaults by businesses who are no longer able to get credit. In turn, that could endanger some of those lenders, making the credit crunch even worse.
So, while the Fed's ability to use traditional interest rate cuts to fight this recession is limited, it has been resourceful about finding other methods to try.
What Does the Fed Interest Rate Mean to You?
The federal funds rate directly affects borrowing by banks, so what does this mean to you?
That rate and other Fed policies go a long way toward determining the interest rates on a variety of consumer financial products, from savings accounts and CDs to personal loans and credit cards.
Low interest rates hurt savers and benefit borrowers. Because rates have been unusually low for over a decade, savers have lost ground to inflation while there has been a huge build-up of borrowing.
A near-zero fed funds rate only adds to that environment. Still, while you can't do anything about Federal Reserve policy, you can adjust your financial decisions accordingly.
What Moves Can Consumers Make in the COVID Recession?
Even with no change in the fed funds rate this time around, the situation remains that interest rates are unusually low and the economy is very weak and unstable.
Here are some financial moves to consider in that situation:
- Keep a steady investment course
Don't panic in and out of stocks with every market swing. Making regular investments and sticking to your long-term plan can improve your results over time.
- Make your own rate hike
Tired of earning next to nothing on your savings, money market or CD accounts? Rate offers from banks differ greatly, with some offering much-better-than-average rates. Shopping around could allow you to raise your rate even while most rates are falling.
- Don't waste money on bank fees
Most checking accounts - and even savings accounts - now charge monthly fees. However, most online accounts do not. So, save your precious dollars by shifting your savings and checking accounts online.
- Conserve your credit
Rates are low; but the worse the economy gets, the harder it will likely be to get credit. Don't be quick to use up your credit limit because it may be tough to get additional credit. Also, protect your credit score because lenders tend to get more choosy in a tough economy.
- Refinance responsibly
Low mortgage rates make refinancing attractive. Try to avoid lengthening the time till you can pay off your mortgage because, even with lower rates, this could increase the total interest you pay over the life of your loan.
Because so many unknowns are involved, this economy is especially subject to sudden changes. Don't delay making moves that can benefit from current conditions. Who knows how long those conditions will stay in place?
Previous Federal Reserve Board Updates articles:
|FOMC Date||2020 FOMC Meeting Update Articles|
|06/11/2020||With No Rate Cut from the Fed, Now It's Your Move|
|04/30/2020||How Will the Latest Fed Meeting Affect Consumers?|
|03/19/2020||Fed Moves Show Urgency of Coronavirus Response|
|01/30/2020||Fed Rate Decision Means Consumers Have a Choice|