With No Rate Cut From The Fed, Now It's Your Move
FEDERAL-FUNDS-RATE TARGET: 0.0% to 0.25%
The Federal Open Market Committee (FOMC) wrapped up its latest meeting on June 10 with an announcement of no change to the federal funds interest rate.
In fact, the Fed's latest economic projections show no expectation of interest rate cuts or hikes for at least the next two and a half years.
Even though the economy is now officially in a recession, the Fed has already made its big moves to aid the economy.
Clearly, the onus is on consumers now to make good decisions and take care of their finances themselves. How well they weather this crisis could depend on how successful they are with five things they can do themselves:
- Build emergency savings
- Preserve credit ratings
- Fight back against falling interest rates
- Reduce what they pay in bank fees
- Make sense of an erratic stock market
Recession Fears Become Reality
It's official: The U.S. economy is in a recession.
So says the National Bureau of Economic Research (NBER), which makes the formal determination of economic cycles. The NBER made this announcement on June 8, the day before the latest two-day FOMC meeting began.
Of course, you probably didn't need the NBER to tell you this was a recession. The 20 million jobs lost, even if some of them are temporary, tends to indicate a pretty major economic setback.
How long do recessions last anyway?
A recession is a shrinking of economic activity. Economic expansion occurs when economic activity is growing. Over time, the economy goes through periods of recession and expansion - though, thankfully, expansions tend to last much longer than recessions.
Even so, since World War II, recessions have lasted an average of just over 11 months. That's a long time to be out of work for those who lose their jobs due to a shrinking economy.
Also, the end of the recession does not immediately mean the economy has recovered. Technically speaking, the recession may be over when the economy starts to grow again, but it can take a long time to replace those lost jobs.
This may prove to be especially true given how steep job losses have been due to the coronavirus pandemic.
How is the Fed Responding to the Recession Now?
Job losses and recession put pressure on the Federal Reserve to respond.
Unfortunately, the main weapon the Fed uses to fight recessions has been blunted by overuse.
Since the Fed kept interest rates unusually low during more than ten years of economic expansion, there was less room for fed rate cuts this time around.
Access to credit
In addition to dropping rates down to near 0% in recent months, the Fed has taken decisive action to make credit available to businesses and financial institutions. This can be vital to keeping economic activity alive - if only on life support - for the time being.
More subtly, the Fed also sent a signal via its updated economic projections from the latest FOMC meeting.
These projections show what the Fed expects from the economy for the current and next two calendar years. This includes what the Fed expects its interest rate policy to be over that period of time.
The latest projections show that, even though the Fed expects the economy to begin to recover in 2021, it does not anticipate any interest rate hikes through at least the end of 2022.
These projections are subject to change over time, and occasionally the Fed has even made rate changes that are contrary to its own projections.
Still, showing an extended commitment to near-zero interest rates may be intended to encourage investors and business leaders. It raises the expectation of a favorable monetary policy even after the current recession has ended.
A signal that it won't be raising rates anytime soon is not as powerful as an interest rate cut. For now, though, it may be the best the Fed can do.
In any case, monetary policy cannot cure the health crisis. There is still the possibility that a second wave of COVID-19 cases could reverse some of the economic reopening that has begun.
What Consumers Should Do Next
Given the limited range of responses the Fed has to this recession, consumers have to rely on themselves more to make the right moves.
Here are five suggestions:
- Tighten your budget to build emergency savings
Don't wait to lose your job or have your income cut. Tightening your budget now can help you build up your savings account so you have an emergency fund to fall back on when you need it.
- Care for your credit rating
Don't be too quick to rely on borrowing to see you through the lean times. As the economy worsens, lenders will be more selective about who gets to borrow.
Limiting your use of credit now can help you maintain creditworthiness while also keeping some of your credit limit available for unforeseen expenses.
- Fight back against interest rate cuts
Falling interest rates mean that you earn less on your savings accounts.
However, since large banks tend to pay the lowest rates, most consumers could actually raise their rates even as rates continue to fall. Shop around, and try online banks for the best savings account rates.
- Avoid paying bank fees
Since money is scarce, why let your bank take it? You can easily avoid checking account fees with online checking.
This is more important than ever, since low interest rates may mean you are paying your bank more in fees than you are earning in interest.
- Choose your stock investments carefully
Low interest rates and a bounce by the stock market have led investors back to stocks. Choose carefully, though. The stock market rally is dominated by relatively few stocks, largely in the tech sector. Some of these may already be overvalued.
The latest Fed meeting offered no easy answers to the latest recession. That leaves consumers to take a series of smaller steps to soften the blow.
Previous Federal Reserve Board Updates articles:
|FOMC Date||2020 FOMC Meeting Update Articles|
|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|