How does Fed’s rate cut to near zero impact your money?

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The Federal Reserve, on Sunday, announced an emergency rate cut, lowering the interest rate to near zero. However, this doesn’t mean you will immediately have access to interest-free debt or super cheap debt or mortgage. On the other hand, this does not mean that the coronavirus-induced Fed rate cut would have no impact on your money. Discussed below is how the latest Fed rate cut may affect your retirement plans, credit card debt, savings and more.

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Fed cuts rate to fight coronavirus

The Fed’s latest rate cut comes just less than two weeks after the first rate cut from the agency to stimulate the economy from the downturn caused by the coronavirus. The Fed initially slashed the interest rate by half a point. The second emergency rate cut brings the federal funds rate to between 0% and 0.25%.

“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent,” the Fed said in a statement.

A point to note is that the Fed rate is more of a guideline and not an across-the-board mandate. However, it is expected that the rate cut would likely lower the interest rate on many financial products, such as loans, savings accounts, credit cards and mortgages by 1%.

Let’s see how the fed rate cut would actually impact your money:

Investments and retirement savings

Usually, a drop on Wall Street lowers the balance in your 401(k) or personal investments. To minimize the loss, you should use a target-date fund to adjust risk tolerance level automatically. Also, ensure that your portfolio is well diversified and include both stocks and bonds.

On the other hand, if there are not many years left for your retirement, you should move the savings to lower-risk financial instruments, such as CDs. This will ensure a fixed interest rate for the period.

Will you save on credit card debt?

Credit Card

You can expect the interest rate on credit cards to drop by about 1%, meaning if the interest rate was 14.25%, then it would now be 13.25%. It may take a couple of billing cycles before this change to actually reflect on your credit card.

Though 1% is a big cut, it may not help you much if you plan to get out of debt quickly. However, if you really want a better debt payoff solution, then the best option would be to open a 0% APR credit card that does not offer any interest on the balance transfers for over a year.

Before you go for the balance transfer credit card, you must know there could be a few restrictions as well. For instance, there could be a restriction on the maximum amount of debt that you can transfer. Also, some companies may not allow transfers between cards from the same bank.

Moreover, you should be aware of all the terms and conditions applicable to you. It must be noted that you need to have a good or excellent credit score to qualify for the balance transfer card.

How the rate cut will impact on mortgages and savings accounts

Mortgages

The interest rate on new mortgages is expected to come down an average by 52 basis points, or about half a percent. This means you can now borrow money cheaply. Those already having a loan will benefit from the reduced rate only if they have a variable-interest rate loan.

A low interest rate environment, however, is best for those who want to refinance their mortgage. But, before you go for the refinance, you must evaluate if the option is worth going for as mortgage refinancing cost is usually two to four percent of the loan amount. You can use an online calculator to determine if there would be any real savings or not.

Mortgage companies are already flooded with refinancing applications considering the low rate environment over the past months. So, if you plan to go for refinancing, you should move now to ensure your application does not get stuck due to a heavy work pressure load.

Checking and savings accounts

The Fed rate cut will also impact the interest you get on the money saved in your checking or savings account. You will now get less interest. However, near zero interest rate does not mean you won’t earn any interest. It has been seen that the online savings account rates were around the 1% mark even during the 2008-2015 zero rate days.

CDs

If you want to earn more interest rate for your money, then you should invest in a certificate of deposit. It is recommended that you move quickly before financial institutions lower the interest rate to align with the latest rate cut. You may also go for a no-penalty CD instead of the usual ones. The former does not charge a hefty fee for withdrawing early.

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at [email protected]

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