You are probably one of the millions of Americans who are concerned about the COVID-19 coronavirus and you are trying to best deal with all the news about it and the risk it imposes. We all are.
Besides the huge health risks, the world economy is dealing with the potential impact the virus is having on it. To help our economy withstand the threat from the rapidly spreading and scary coronavirus, the Federal Reserve sliced interest rates by the largest amount since 2008. While many financial experts feel that a Fed rate cut may not have any impact on what’s happening, it’s a big move that might have impact on the credit cards in your wallet, the rates you pay for a home loan or a refinanced mortgage, and many other borrowing costs, too. Whether it encourages the consumer to keep buying as they have been for the past several years during this medical crisis is another thing completely.
The Fed Rate Cut
The lowered rate was the first emergency cut since the financial crisis in 2008. While bond markets had been pricing in at least a quarter-point reduction in March, the timing of the cut came as a surprise. It was expected that the Fed would wait and perhaps make a move at its next scheduled meeting, March 17-18, so this cut came as a shock.
The Fed’s action was a response to the roller coaster ride that the market took and is taking almost every day over the last week. The stock market has risen and fallen in serious extremes since the coronavirus struck here in the U.S., and the world economies began to react negatively to that.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the Fed said, as it announced it was cutting its benchmark interest rate (the federal funds rate) by one-half of one percentage point, a range of just 1% to 1.25%. And the Fed also said that it’s prepared to do even more if necessary to stimulate the economy. It isn’t clear to what extent they would do more.
The Big Six Effects
The Fed rate cut will impact a number of areas that will affect you. Here’s a look at the big six specific ways you’re likely to feel it—and when.
1. Refi’s and new mortgages will be cheaper
Homeowners will see a real benefit in interest rates, especially to adjustable rate mortgages. It’s a little uncertain as to exactly when the rates will reflect this chop by the Fed, but if you are thinking about a refinance or shopping for a new mortgage this could be your very lucky day!
Most adjustable-rate mortgages and home equity lines of credit (HELOCs) are tied to the prime rate. If you have such a mortgage or if you have drawn on your home equity (HELOC), your interest rate should be coming down. That should happen within a few months and make your monthly payments lower.
Long-term mortgage rates have been falling now for a while and and were near all-time lows before this Fed cut. This action may tip the rates even further. Last year, the low mortgage market rates led 11.1 million homeowners to save an average of $268 a month by refinancing according to data firm Black Knight.
2. Student loans will get a trim in monthly costs
Student loans, which are huge, will see costs go down if they are variable interest rate loans. A variable rate is an option when you take out private student loans offered by banks. How soon will these costs go down? It can happen very quickly, perhaps over the next two months.
For all federal student loans, the rates are always fixed interest rates, which have already been falling. The fixed rate on a federal Stafford loan fell to 4.53% for the 2019-2020 academic years from 5.05% (over a half point) during the previous school year according to Savingforcollege.com. Students have benefited from those rates, but borrowers have the potential to save hundreds more on their loans.
To best take advantage of the reduced rate, new borrowers should look at fixed rates and compare them to the adjustable rates before they commit.
3. Credit card interest rates will go down
Lower rates will be on the way to your variable interest rate credit cards in a few weeks. Whenever the Fed cuts its federal funds rate, banks respond by lowering the prime rate, the interest they charge their best borrowers. Because credit card rates are often tied to the prime rate, they come down, too. This is good news if you’re carrying balances on your cards. If so, hopefully you’ve made a plan to pay down your debt.
4. Auto financing will get cheaper
The average rate on a 60-month new-car loan is now 5.37%, according to the most recent Federal Reserve data. That’s almost a full percentage point higher than what borrowers were getting just three years ago in 2017. Over the next few weeks, those rates will drop after the Fed rate cut.
Monthly car payments (averaging $550 a month right now) and soaring vehicle prices have made car purchases more expensive, but the rate cuts will make car financing better for the consumer.
When you shop for a new car, make sure you do some research on rates and lenders, and comparison shop for your auto loans to get the best deal. Auto interest rates are just another good reason to make sure your credit is as good as it should be.
5. Interest rates you earn will drop
Lower rates from the Fed will put pressure on banks and savings account interest rates. The average interest rate on savings right now is just 0.09%, according to the FDIC, but you can do considerably better with a high-yield money market account.
Banks will follow the Fed’s lead and pull those rates down. But the good news is that online banks are offering consumers much better rates, so the large brick and mortar banks may be forced to try to stay competitive.
If possible, think about Certificates of Deposit that offer higher rates. They often are as high as 2.0% even for a 1-year term, so act before any rates are dropped due to these rate cuts.
6. Some things might just cost more
When interest rates are cut, it weakens the U.S. dollar. When the dollar is weaker, exchange rates are less favorable for Americans when they travel overseas. That means your vacation plans may be in for a spike this summer. When you travel outside the U.S., you will probably pay more for meals, hotels, souvenirs, and everything else, because your dollars won’t buy as much.
For consumers, it may also be some bad news. U.S. manufacturers like it when the buck is less robust, because that makes their products cheaper overseas and helps them sell more of their products internationally. But for buying imported goods here, it’s a different story. Imported items such as appliances and electronics likely will be more costly because our dollar is weakened.
The Future of Interest Rates?
Lower interest rates are not something brand new around the world. Many foreign interest rates are incredibly low and in fact, they’re below zero. This means depositors pay banks a fee to hold their money instead of earning interest. As crazy as that might sound, it’s true.
In fact, President Trump is doing something that no president has ever done before. He is actively weighing in and calling for the Fed to lower all rates and even create “negative” interest rates here in the U.S.!
Even small changes in interest rates can have a profound effect on us all, so normally the Fed only lowers or raises rates by very small increments like just 0.25% point at a time. This Fed rate cut is a rare 0.50% cut. A change of a half percent or higher is not unprecedented in a time of economic uncertainty and this week showed exactly how uncertain things are and they could get worse. An economic retreat spurred by the virus concerns can damage the U.S. and the world economies quickly and so the Fed took preemptive action. Time will tell exactly what these cuts really mean and how it may or may not help you.