What Consumers Can Do as Fed Keeps Rates Near Zero

FEDERAL-FUNDS-RATE TARGET: 0.0% to 0.25%

Against the backdrop of a still-unsettled election, the Federal Open Market Committee (FOMC) meeting that concluded on November 5 flew quite under the radar.

The lack of change in the fed funds rate is not the only reason the focus is likely to stay on the White House rather than the Federal Reserve in the near future.

After all, when the votes are all counted, whoever wins the Presidency will still have to deal with the pandemic and the recession. Under the circumstances, there is little the Fed can do about either of those problems.

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Is This Still a Recession?

The key to the Fed's interest rate decisions is the economic environment.

If inflation becomes a problem, the Fed may use rate hikes to try to cool things down. On the other hand, if the economy becomes weak, the Fed may cut rates to pump up the economy.

Status of inflation

Inflation hasn't been a problem in recent years, but economic weakness has been a concern in 2020. Even before the pandemic struck, there were signs the economy was slowing down. Then things went from bad to worse during the second quarter, when high COVID infection rates forced much of the economy to shut down.

Last week, the Bureau of Economic Analysis announced that the economy had bounced back strongly in the third quarter. Though the growth rate looked impressive, it was not enough to undo the damage done in the first two quarters of the year. So far, real U.S. GDP is down by 3.5% in 2020.

Status of employment

The job market, which is a major driver of Fed policy, paints an even bleaker picture of the economy. Despite gaining back some ground during the third quarter, employment is still about 10 million jobs below where it was when the year began.

Of even greater concern to the Fed than what has happened so far in 2020 is what will happen next. With infection rates accelerating once again, it is entirely possible that some of the third quarter's economic progress will be lost by year end.

In short, it is too early to declare the recession over. The combination of a weak job market and minimal inflation point strongly to a continued Fed policy of exceptionally low interest rates.

Outcome of the Latest FOMC Meeting

The FOMC announced it was leaving its target range of short-term interest rates unchanged, within a range of zero to 0.25%.

Low interest rates are the Fed's standard response to a weak economy; and with rates already near zero, there is little else the Fed can do.

The FOMC did reiterate that it would keep rates extremely low for the foreseeable future, even if that meant letting inflation run moderately above the Fed's 2% long-term target for a while.

How to Fight Back Against Interest Rate Cuts

With the Fed's commitment to hold interest rates down to near zero for the foreseeable future, consumers with deposit accounts face a clear choice: they can accept less interest on their money or they can fight back.

Here are five ways you can fight back against low interest rates:

1. Shop for rates

   Have you compared your bank's rate to other banks lately? A recent MoneyRates.com America's Best Rates Survey found large differences between the best rates and average rates for savings accounts, money market accounts and CDs. More interest in your account is there for the taking if you do a little comparison-shopping.

2. Avoid the big banks

   The largest banks with the most branches tend to offer much lower than average rates. The large size of these banks means that these sub-standard rates affect a huge portion of consumers. If you are one of those consumers getting a poor rate from a huge bank, you have a clear opportunity to raise your rate by switching banks.

3. Bank online

   The latest America's Best Rates survey found that the average online savings account rate was 12 times the average rate on traditional, branch based savings accounts. Online accounts also offer a clear advantage for money markets and CDs.

4. Watch out for fees

   Are you paying a maintenance fee on your checking or savings account? While these fees are common, there are many accounts that don't have them. At a time when any fee could easily wipe out the interest you are able to earn on an account, why pay a fee unnecessarily?

5. Use CDs carefully

   Traditional wisdom is that when interest rates are falling, it is a good time to lock in a rate with a CD. This is still true to some extent, but the current situation makes this strategy less appealing than usual.
   With interest rates already near zero, it is unlikely that rates will continue to fall much further; and since CD rates have fallen faster than savings or money market rates, the advantage of committing to a CD has been reduced.

Given the economic challenges it faces, the Fed sees no alternative to keeping interest rates unusually low. Fortunately, consumers still have the above options for raising their interest rates.

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