You Can Do More About Rates Than The Federal Reserve

The latest FOMC meeting ended with no fed rate cut and the likelihood of no interest rate cuts in the near future. Here's what consumers can do since the Fed has limited answers for this recession.
By Richard Barrington
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Federal-Reserve-Bank

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


The Federal Open Market Committee (FOMC), the subgroup of the Federal Reserve that makes monetary policy decisions, held its latest meeting on January 26 and 27.

Not surprisingly, the message coming out of that meeting was that the Fed will make a continued effort to hold interest rates down. The Fed made it clear that the dominant driver of its current policy is the recession resulting from the COVID-19 pandemic.

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Key Results of the FOMC Meeting

In an effort to combat the recession, the Fed announced that it would keep its short-term-interest-rate target in a range of 0% to 0.25%. This has been the Fed's target range since last March.

As a practical matter, the FOMC has been keeping the federal funds rate toward the lower end of that range. Maintaining rates so close to zero represents a pedal-to-the-metal approach to monetary policy. The Fed is doing everything it can with short-term rates to support the economy.

Long-term rates, which affect mortgages and other loans, are not directly controlled by the Fed. They are set by market forces, but the Fed is doing what it can to influence those forces.

Following the recently concluded meeting, the FOMC announced that it would continue to buy Treasury and mortgage-backed securities. By creating demand for these securities, the Fed is helping to keep interest rates low in the long term so that borrowing remains relatively inexpensive.

Fed Interest Rate Outlook

Since the end of March, 2020, the Fed has kept the fed funds rate at 0.10% or lower. Low interest rates are the Fed's go-to move for addressing a recession; but after a series of three interest rate cuts in 2019 and even steeper cuts early last year, the Fed has pretty much run out of room to cut rates.

With rates unlikely to go much lower, the only other direction they could move is higher. If inflation flares up - as it showed signs of doing in the second half of 2020 - the Fed could be forced to raise rates to cool it down. However, the Fed indicated that it is willing to tolerate some inflation in an effort to stimulate the economy.

That means rates are not likely to change until the Fed is satisfied that the recession is safely over.

An Inverse Relationship: Interest Rates and the Pandemic

No matter what the Fed does with interest rates or the government does with stimulus programs, ending the recession really comes down to containing the pandemic.

After all, even if people have the means to spend money, health restrictions have greatly limited opportunities to do so. That in turn has eliminated millions of jobs and destroyed many businesses.

For this reason, interest rates and the pandemic are inversely related. Interest rates are unlikely to go up until COVID cases go sharply down.

The Fed acknowledged the dominant role of the pandemic in its statement following its most recent meeting. It cited the health crisis as the key factor suppressing economic activity and mentioned that the upcoming course of the economy would depend very much on the progress of vaccinations.

Interest Rates Have Flat-lined: What to Do Now

Projections made at the last FOMC meeting indicate that the Fed expects rates to stay at around the current level through at least 2023.

This suggests that the Fed holds out little hope of a sudden turnaround in the economy that would prompt an interest rate hike. At the same time, despite the recession, there is virtually no room for an interest rate cut with rates already close to zero.

With the Fed's outlook for rates to remain flat at just above zero, here are three money moves consumers should consider.

  1. Smart shopping is the only way to raise your rate.

    Interest on savings accounts, money market accounts and new CDs has taken a beating in the past year. Based on the Fed's outlook, it doesn't seem likely to get better any time soon.

    So, if you want to earn more on your bank deposits, you have to do more than wait around for the Fed to raise rates. You can raise them yourself by shopping around to take advantage of the wide gap between the top bank rates and the average.

  2. Consider a CD ladder.

    A CD ladder is a series of CDs that mature at different times. With rates near zero, the benefit of a CD ladder is that it allows you to earn some of the higher yields associated with long-term CDs without locking all of your money in for a long time in case rates rise.

  3. It's a good time to borrow if you're on solid financial ground.

    Across the board, low interest rates mean it is cheaper to borrow, whether via a personal loan, car loan, credit card or mortgage. That makes this a good time to borrow, but only if you are confident in your finances.

    That means two things:

    • First, that you have a strong enough credit score to get credit on good terms.
    • Second, that you are secure enough in your job that you will be able to meet your payment obligations.

Of course, the FOMC has been wrong before about its economic projections, including those for the fed rate that the committee itself sets. The beauty of the moves described above is that they could benefit you now without putting you at a great deal of risk if the Fed turns out to be wrong about interest rates.


Previous Federal Reserve Board Updates articles:

FOMC Date2020 FOMC Meeting Update Articles
12/17/2020Fed Meeting Makes Life Tricky for Consumers
11/06/2020What Consumers Can Do as Fed Keeps Rates Near Zero
09/17/2020The Fed's New Tolerance for Inflation Could be Trouble for Consumers
07/30/2020Fed Rate Unchanged: What Consumers Should Do
06/11/2020With No Rate Cut from the Fed, Now It's Your Move
04/30/2020How Will the Latest Fed Meeting Affect Consumers?
03/19/2020Fed Moves Show Urgency of Coronavirus Response
01/30/2020Fed Rate Decision Means Consumers Have a Choice

 
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