What Does the Federal Reserve Interest Rate Cut Mean for You?
In an effort to curb disruptions and an economic slowdown resulting from the spread of the coronavirus, on March 15 the Federal Reserve made yet another cut to the federal funds rate, reducing it by 1%. This cut put rates in a range of 0% to .25%. The interest rate cut was the second in March and the largest fed rate cut in the Federal Reserve’s history. The goal is to encourage spending in order to slow down the economic impact of COVID-19.
This latest fed rate cut will impact everyone but not necessarily benefit everyone. One of the goals of a fed rate cut is to bolster the volatile stock market, which has suffered substantial losses as of mid-March. The stock market is usually seen as a gauge for how strong or weak the economy is so that a significant drop can hit investors’ financial confidence hard.
Businesses Could Benefit From the Fed Rate Cut
One goal of the fed rate cut is to encourage businesses to borrow money for expanding their operations, hiring more employees and investing. While larger corporations such as grocery stores, Amazon, teleconference providers and pizza delivery companies are hiring in large numbers to meet customer demand, there are many more large and small companies that have implemented a hiring freeze.
Given the nationwide recommendation for social distancing, many businesses have transitioned their employees to working remotely or have temporarily closed their doors, eliminating the possibility of expansion or hiring for the foreseeable future.
Still, businesses could see some benefit from the interest rate cut with regard to their financing options. Those who have a business line of credit or credit card likely will see lower interest rates, although not right away. It could take up to two billing cycles for statements to reflect reduced interest rates.
For many businesses, this also could be an ideal time to seek out business loans, which could have lower interest rates. The interest rate cut encourages lenders to be more forthcoming when issuing loans in an effort to stimulate the economy. This could be very beneficial to help businesses keep their bills paid, make payroll, and order much-needed supplies or inventory.
Lower Rates on Credit Cards, Mortgages and Car Loans
For some Americans, the coronavirus interest rate cut could help those looking to purchase a home or refinance their existing mortgage by closing on some very favorable rates. However, for those with fixed-rate mortgages, the interest rate cut may not be sufficient enough to warrant refinancing. Other benefits of the fed rate cut may include:
- If you currently owe on a home equity line of credit, you could see a reduced interest rate, which means more of your money could go toward the principal.
- Consumers who have credit cards with variable interest rates could see rates go down, although you likely won’t see a change on your statements for at least 60 days. It also could be a good time to shop around for another credit card with a lower rate, especially if you’re looking for a fixed rate.
- If you’re in the market for a new car, this could be the best time to buy since new car loans will experience lower rates. As the economy continues to slow, you may even see more financing offers with low- or zero-interest rates over longer terms beyond 60 or even 72 months.
4 Ways to Be Mindful of Your Spending Habits Going Forward
While the coronavirus interest rate cut could result in some financial gains for some consumers, any spending or decisions to take on more debt should be taken only after careful consideration. The first step should be examining your budget to see if additional debt is feasible for your financial circumstances.
- If you’ve been thinking of purchasing a home or refinancing your existing mortgage, speak to several lenders to see for which rates you currently qualify. Ask about 15-year mortgages as well as long-term mortgages. If the rates are low enough, you may be able to get a mortgage for a much shorter term than you initially thought.
- Now could be a great time to shop around for a new credit card with a lower interest rate. Talk with your existing credit card company to see if they’ll make a great offer to keep your business, but also take time to speak with other companies to see what terms are available to you.
- Business owners can speak with lenders to find out what financing options are available to help them achieve both their short- and long-term needs. This allows you to find the best financial terms for your business.
- Throughout this process, consider if you will have the means to pay off any debt you take on now over the long term. Lower interest rates should not be an enticement to take on more debt if you can’t realistically afford to pay it back.
Running the Numbers While Staying Home
The main takeaway from the coronavirus rate cut is that it’s unclear how long rates will stay this low, so any real benefit may not be realized before rates start to go back up. The rate cut probably won’t drive people to make large purchases or take out loans that they weren’t already planning during this time of uncertainty.
If you were already considering or involved in a home or car purchase, however, you may get lucky and end up locked in with a low interest rate that could save you hundreds or thousands of dollars in the long term. If you’ve got some extra time during the coronavirus quarantine, you may want to run the numbers to see if you could benefit from the latest fed interest rate cut.
About the Author
- NPR. "Markets In Europe, Asia Plummet After Central Banks Slash Rates Amid Coronavirus." Accessed March 24, 2020.