At nearly the beginning of the pandemic of 2020, the Federal Reserve lowered interest rates to assist the American public in sparking the economy. Typically, lower interest rates inspire consumers to spend more money in the market, but this time is like no other time in recent history. Most consumers remain conservative in their spending despite the lower fed rate, and since the rate is nearly zero, the government is left with very little wiggle room to help the American people.
Before we get into how this can affect you, what exactly is the federal funds rate, and where do you see it in your everyday life?
What Is the Federal Funds Interest Rate?
The federal rate is the interest rate that banks charge other banks, and it’s the basis for all other interest rates. For example, if you look at your credit card paperwork, your rate is probably listed at the fed rate plus a fixed interest rate. So, if the fed rate is .75 percent, maybe your rate is .75 percent plus 10 percent. The same holds true for car loans, mortgages, and the like.
When the Federal Reserve lowers the interest rate, it’s an attempt to encourage you to go out and spend money and keep the economy moving. That move from the Fed usually works, but with the pandemic continuing and no monetary help from the U.S. government, citizens just don’t have the money needed to jumpstart the economy, as they would under normal circumstances.
What Does It Mean to You?
What lower interest rates mean to you depends on where you stand financially. If you carry a lot of debt, the favorable interest rates might mean you can consolidate that debt at a reasonable rate so you can make one loan payment to pay off your credit cards. On the other hand, if you own a home, low-interest rates could make this the perfect chance to refinance and lower your monthly payment.
Low-interest rates might sound great, and you can probably benefit from it, but use caution. The reasonable deals you see could tempt you to take on more debt than you should. Consider this: All of a sudden you can afford to finance a car, but if you don’t need that car, taking on that debt could hurt you in the long run. Think about your finances as a whole before entering into any low-interest deals unless they help you get into a better financial position.
How Long the Rates Might Last
The pandemic’s extended length will leave economic scars long after the virus is under control, and the Federal Reserve recognizes that. Since there’s no wiggle room to lower the rates, the Fed expects to keep interest rates low through 2023. That said, if the government comes through with another comprehensive economic package and sparks consumer spending earlier, they may start to rise before that.
But without assistance, consumers are more likely to hold onto more funds than they spend so they can pay their bills and feed their families. The longer the economy stalls, the more you’ll see low-interest rates from the government.
Get Yourself In a Good Position
Nobody knows what the future holds, so the best thing you can do is to keep your finances as clean as possible. That way, if the U.S. dips deeper into a recession, you’ll be as financially ready as you can be.
Cleaning your finances means lowering your expenses, paying off your debts, and maybe finding a new or additional income source. Also, take advantage of the low-interest rates while they’re here to lower your payments and use a service like Georgetown Funding to consolidate your outstanding debt to pay it down. Those steps will get you financially ready for whatever comes next.