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What’s Happening to Interest Rates and Why Does It Matter?
On Sunday, the Federal Reserve announced it would slash interest rates by one percentage point down to 0%-0.25% as a rare emergency action against the financial instability caused by the COVID-19, or coronavirus, pandemic. This follows the previous March 3 decision to cut the rate by half a percentage point.
Aggressive monetary policy moves like this are intended to grease the gears of the borrowing and lending industries. According to Bankrate, the federal funds rate is “the interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis.” This baseline rate affects all other rates, from credit cards and savings accounts to mortgages and student loans, and has a cascading effect on the economy and the willingness of banks and businesses to borrow from one another.
The action won’t provide immediate relief to the global economy. Instead, it will be more helpful after this period of financial volatility passes.
“Reducing benchmark interest rates will set the stage for increased borrowing by consumers and businesses once the virus passes and we press ‘resume play’ on the economy,” explains Greg McBride, CFA, senior vice president, chief financial analyst, for Bankrate.
Sunday’s announcement signals the largest emergency cut in Federal Reserve history. The last time rates were slashed to respond to a global crisis was in 2008 during the Great Recession.
What does this mean for me?
Though the interest rate was received as bold by financial analysts nationwide, average Americans are unlikely to feel a significant trickle-down effect. This wasn’t meant to create a bump in the stock market, McBride says, and indeed, there wasn’t one.
However, you will likely see changes to interest rates on savings accounts, credit cards, mortgage loans, certificates of deposit, money market accounts, and loans of all kinds in the coming months.
“Expect lower borrowing costs, but also lower earnings on your savings,” McBride says.
If you have student loans or an existing mortgage, you may be able to refinance them at a more affordable rate, but the interest rate cut won’t have any effect on fixed-rate loans. People with credit card debt will see a decrease in the interest rate on their balances, likely within 30 to 60 days.
However, the interest rate on your savings account and other variable-rate deposit accounts will likely decrease, in keeping with the downward shift of the past several months.
The bottom line
The emergency Federal Reserve interest rate cut is intended to grease the wheels of the economy once the virus has passed. It will have effects on all consumer rates — some beneficial, some negligible or annoying — but not enough to make the average person rich or curb the worst of a potential recession.