What the Feds Emergency Rate Cut Means for Your Money
The Federal Reserve announced an unexpected rate cut this morning due to growing concerns about the economic impact of the coronavirus.
The Federal Open Market Committee of the Federal Reserve made an “emergency” rate cut to lower the federal funds rate target from 1.75 to 1-1.25%.
“The fundamentals of the U.S. economy remain strong,” a press release from the Federal Reserve noted. “However, the coronavirus poses evolving risks to economic activity.”
At half a percentage point, this is the largest reduction since 2008, the height of the financial crisis. But just because the Fed took advantage of its ability to make an emergency adjustment outside of its scheduled meetings doesn’t mean we’ve entered national financial panic mode.
It does, however, indicate that we’re acknowledging the arrival of an unpredictable economic period.
Wait, weren’t we done talking about a recession?
A rate cut may help keep the economy stable as we figure out the ultimate scope of the outbreak, but it’s not exactly a calming move.
“Lower interest rates do little to make consumers and businesses feel substantially more confident about the future when a health crisis is spreading around the world,” said Bankrate’s senior economic analyst Mark Hamrick. “It also cannot address the hobbled supply chains, including manufacturing capability in China and South Korea. Still, the Fed is doing what it can to try to keep the economy out of recession.”
I know, we all hate the R word. But take a look at where we were less than a year ago. The Fed cut rates three times last year, amidst rampant discussion about an impending economic slowdown. That discussion stalled—much to everyone’s relief—at the turn of the new year…until this health event sprung up and threw things out of whack.
So, what does it mean for your money? Hold on tight and consider these areas:
Take advantage of “cheaper” debt
If you’ve been thinking of buying a home or refinancing, it could be time to move forward. “Lower rates provide an opportunity for lower-cost borrowing including for mortgages,” Hamrick said.
The rate cut doesn’t mean that if you compare mortgage rates today, you’ll suddenly get a rock-bottom interest rate. But if you’re shopping around in the next few weeks, you’ll start to see notably lower rates.
The same goes for credit cards. If you have a card with a variable interest rate, you may see that go down. If you’re in debt, it’s a great time to try to pay off as much of it as you can. But do check your rates and terms: loans and credit cards with fixed interest rates won’t change for your entire repayment period, so you may want to stay the course on those debts.
Don’t abandon your savings
This rate cut means it’s very likely that your high-yield savings account is going to reduce its APY. But that’s no reason to empty out your savings account. Even an interest rate of 1% is far more than you’ll earn in a regular savings or checking account.
If you want your money to go further during this period, you can consider contributing less to your savings and instead using that money to pay down your debt more quickly. Or, you can lock in an interest rate with a CD.
It’s probably not worth shopping around for a better savings account, though—they’re all going to drop their APYs in light of the rate cut.
Resist the urge to fiddle with your investments
You may have seen that the stock market turned into a trash heap last week, but by Monday afternoon had experienced a considerable rally. And if you’ve looked at your portfolio during this ridiculous rollercoaster, you probably feel a bit sick to your stomach.
But if you’re investing for the long term, our advice remains to play it safe right now. If you hold on to your assets, you’re in a good position to regain those losses well before it’s actually time to sell.