Although the federal funds rate – this is what banks charge each other for short-term borrowing – is not the rate consumers pay, the Fed’s measures still affect the borrowing and saving rates they all see days.
The Fed’s historically low lending rates make it easier to access cheaper loans, but also make it less desirable to build up liquidity.
Here’s a breakdown of how consumers can take advantage of these easy monetary policies while they last.
Borrowers have a head start
For starters, homeowners have an unprecedented opportunity to refinance or take out money from their homes at record rates.
The 30-year average fixed rate home loan is around 3.04%, the lowest since February, according to Bankrate.
“The ability to refinance a mortgage and reduce your payment from $ 150 to $ 200 per month creates valuable wiggle room in the household budget,” McBride said.
Once the Fed begins to slow the pace of bond purchases, long-term fixed mortgage rates will inevitably rise, as they are influenced by the economy and inflation.
Many homeowners with variable rate mortgages or home equity lines of credit, which are indexed to the prime rate, will also be affected. While some ARMs are reset every year, a HELOC could adjust within 60 days.
The same goes for other types of debt, especially credit cards.
Credit card rates are now as low as 16.16%, from a high of 17.85%, according to Bankrate.
When the federal funds rate increases, the prime rate will also rise, and credit card rates will follow since most credit cards have a variable rate, which means there is a direct link to the benchmark. from the Fed. Cardholders will see the impact in a billing cycle or two.
For now, borrowers can use a home equity loan or a personal loan to consolidate and pay off high interest credit cards.
When it comes to college debt, even student borrowers are getting a break thanks to the CARES Act, which suspended federal student loan repayments until September.
Now is a great time to stay up to date on payments, McBride said. “With no interest accruing on federal student loans, you can really make a big dent in the principle,” he said.
Savers must be resourceful
Anyone who hides money will have a harder time taking advantage of low interest rates to their advantage.
Although the Fed does not have As a direct influence on deposit rates, these tend to correlate with changes in the target federal funds rate and, as a result, savers earn next to nothing on their cash.
Since March 2020, when the Fed cut its benchmark rate to near zero, the average yield on online savings accounts has fallen from 1.75% to 0.45%, according to DepositAccounts.com founder Ken Tumin.
In some of the largest retail banks, the average savings account rate is even lower, down to a mere 0.06%, or less.
“In addition to Fed policy, record high bank deposits as well as weak demand for loans have contributed to record deposit rates,” Tumin said. “It will likely be a headwind on deposit rates even after the Fed starts to raise its benchmark rate,” he added.
When the inflation rate is higher than the savings account rates, the savings money loses purchasing power over time.
Investors concerned about inflation eroding the value of their money may want to be more proactive about the fixed income portion of their portfolios.
One way to do this is to use inflation-protected Treasury securities. Stocks and mutual funds will beat inflation in the long run as well, but that will require taking more risk – at a particularly precarious time, according to HYCM’s chief currency analyst Giles Coghlan.
While investments in equities have risen in value in recent months as global indexes have reached all-time highs, this is largely due to the support they found in an accommodative monetary policy, Coghlan noted.
Once the Fed signals the end of its accommodative monetary policy, “then the stock markets will fall, which will affect those who hold assets in that market.”
“Diversify through a range of investments that would do well under different circumstances,” advised Ma of Columbia. “Some protection is good,” she said, but don’t “put all the eggs in the high inflation basket.”