As of March 16th, 2020, the Federal Reserve has decreased its interest rate by 100 points, leaving this percentage between 0 and .25 percent. Just two weeks before, on March 3rd, 2020, the interest rate was 1 to 1.25 percent. This drastic rate drop is a reaction to the Coronavirus and the effect that it has had on the American economy thus far. In an effort to stabilize the financial market and support the economy, the Fed is taking drastic measures. On top of lowering federal interest rates, it also plans to purchase $700 billion in bonds and securities.
Why does the Fed decide to lower or raise interest rates?
When the economy is uncertain, the Federal Reserve may decide to lower interest rates in order to help keep it above water. When interest rates are lowered, it makes the cost of borrowing money a lot more feasible. It also encourages businesses to hire and invest with more confidence. When the economy is doing well, it is likely that the Federal Reserve will increase interest rates in order to offset any potential excess spending. When these rates are increased, it often discourages businesses and consumers from making certain purchases or investments. These rates are characterized as short-term since they change often. The Federal Open Market Committee meets eight times a year to re-evaluate this number and will change it according to the status of the economy. If you have a credit card, a savings account, or plan on getting an auto loan, this information may be relevant for you and your loved ones.
If you have a credit card, you will most likely see a decrease in interest rates. Credit card interest rates normally follow suit when Federal interest rates increase or decrease. Right now, even though the Fed is lowering interest rates, interest charges on purchases and APR percentages are still quite high. The most you can expect your credit card’s interest rate to drop is around 0.50%. This change takes a couple of billing cycles to reflect, so you should be seeing these minor reductions in interest within the next month or so.
Savings and CD Rates
Savings accounts will see an opposite effect because of these lower federal interest rates. Lower rates for a savings account means that you will be seeing lower contributions to your savings. For example, if you had $10,000 in your savings account and CD (Certificate of Deposit) rate of 2%, your savings balance will be $10,200 at the end of the year. As this rate drops, so does the amount of your CD contribution. In order to stay ahead of these Fed rate changes, it would be wise to regularly check on your bank’s annual percentage yield. For a list of banks offering the best deals on savings accounts right now, be sure to check out Bankrate’s “Best Online Savings Accounts for April 2020”.
Auto Loans Rates
One of the industries that are offering lower rates is the Auto industry. If you’re in the market for a new car, now is a good time to consider your options. Since auto loans are generally tied to the Fed’s rate, the rates decrease and increase accordingly.
The state of the economy is one that changes on a daily basis and these interest rates are re-evaluated every month and a half. Many people are experiencing the fallout that the Coronavirus has brought into our daily lives. Finances are more vulnerable than usual, and uncertainty is at an all-time high. There is one thing that we can count on during these trying times, and that is change. The circumstances that we see ourselves in today are not the same as the ones that we will see ourselves in a few months from now. All we can do is try our best to change with times and be as smart as we can with what we have.