How the Federal Reserve’s decision affects your money
the Federal Reserve said on Wednesday it would keep its benchmark interest rate close to zero until the economic recovery gains momentum.
As the federal government implements a mass vaccination plan and considers additional stimulus measures amid the coronavirus crisis, the central bank is keeping its pledge to help ordinary Americans weather the pandemic.
This means that the lowest rates will remain for the time being.
“Even if everyone gets vaccinated, it will take some time for the economy to pick up,” said Yiming Ma, assistant professor of finance at Columbia University Business School.
“It will happen, but the time horizon is probably not this year,” she added. “Take this time to look for opportunities.”
With millions of people without work and a growing number of Americans feeling cash strapped, Fed policies can help, even without another Covid relief plan.
Although the federal funds rate, which is what banks charge each other for short-term borrowing, not the rate consumers pay, the Fed’s actions still affect the borrowing and saving rates they see every day.
Today, the average 30-year fixed rate residential mortgage is close to a low record at 3%, down from 3.77% a year ago, according to Bankrate.
Homeowners can save a few hundred dollars on their monthly payment by refinancing at a lower rate, if they haven’t already.
“It’s what has the biggest impact on household budgets,” said Greg McBride, chief financial analyst at Bankrate. “The drop from last year to this year is so big that the refinancing savings are pretty compelling.”
The same goes for other types of debt, especially credit cards.
Most credit card have a variable rate, which means there is a direct link to the Fed’s benchmark rate.
Since the central bank started cutting rates a year ago, credit card rate fell to 16.03%, from a peak of 17.85%, according to Bankrate.
“Now is a great time to try and refinance your high interest debt,” said Matt Schulz, chief credit analyst at LendingTree, an online lending market..
“Zero percent balance transfer credit cards are available, especially if you have good credit,” he said. “We have also recently seen a decrease in APRs with personal loans, which can be a great tool for refinancing and consolidating debt.”
The average interest rate on personal loans has now fallen to 11.84%, according to Bankrate.
“The key to fully benefiting from the Fed’s actions is to compare the rates of different lenders on all financial products in order to find your best deal,” said Tendayi Kapfidze, chief economist at LendingTree.
“It could save you thousands of dollars in interest charges and better help you ride the waves of this economic storm.”
Even students can pay less for their student loan debt.
For those struggling with unpaid balances, the new administration has offered some relief by suspend payments on federal student loans until at least September 2021.
If possible, McBride advises borrowers to keep paying anyway to reduce that balance while there is a stay in interest charges. “Make hay while the sun is shining,” he said.
Private loans can have a variable rate linked to Libor, prime rates or treasury bills, which means that when the Fed keeps rates low, those borrowers can also benefit, depending on the benchmark and the terms of the loan.
This also makes it a good time to refinance private student loans or ask your lender for this. options are available.
As the economy recovers, paying off high-cost debt and building emergency savings are the most important actions consumers can take, McBride said.
“There’s a lot of work to do and between stimulus checks and tax refunds, this is a good time of year to do it,” McBride said. “It can go a long way in building your savings cushion.”
Don’t expect to earn anything from a standard savings account.
Although the Fed does not have direct influence on deposit rates, these tend to be correlated with changes in the target federal funds rate.
As a result, the average savings account rate has fallen to 0.05% or even less at some of the largest retail banks, according to the Federal Deposit Insurance Corp.
“The 2020 stimulus checks contributed to record levels of deposits in banks,” he said. “If new stimulus checks increase deposit levels in banks, demand for deposits will decline further, which will put further downward pressure on deposit rates.”
When the inflation rate is higher than the savings account rates, the savings money loses purchasing power over time.