What The Fed Interest Rate Cut Means For You

The interest rate is down to 0%

On March 15, the Federal Reserve cut the interest rates for the second time in a month. The rate cut of a full percentage point left target rates at 0%-0.25% — “the same level that prevailed from the financial crisis in 2008 [into the recovery of] 2015,” explains Greg McBride, Chief Financial Analyst at bankrate.com.

This move was made in an effort to keep borrowing cheap so the economy stays stimulated and so consumers continue to spend, even in times of financial precarity, says Bill Losey, President Bill Losey Retirement Solutions, LLC.

But what will the upshot actually be? McBride says he doesn’t expect anyone to go out and buy a new car right now, given the current state of the economy. He predicts that low interest rates will become meaningful when we are on the other side of the coronavirus. “That backdrop of really low interest rates will spur a lot of consumer and business borrowing and spending that we will need to revive the economy,” he says. Once we’re out of this slump and people are ready to buy, they will jump at the chance to make a big purchase, or take out a loan, at such a cheap rate.

So what actions should you be thinking about?

  • For those with existing loans, like a mortgage or a car loan, this rate cut can mean a lot of savings, but you have to take the time (and the money) to refinance that existing loan in order to get a better rate. Refinancing a car loan won’t save as much as a mortgage — you’ll probably save $15 – $20 a month on the former compared to potentially hundreds on the latter. But the car is also a faster process compared with the home.
  • For those looking to consolidate pricey debt, it might be time to call your financial institution to inquire about a personal loan at a lower rate or a balance transfer credit card with a compelling zero percent rate for the first year-ish you carry it. If you opt for the latter, just be sure the fees to transfer a balance are less than the amount you expect to save in interest.
  • For those carrying a credit card balance, it’s time to make hay. Lower interest rates on credit cards are automatically applied, which means that you’ll be able to pay off your balance faster than you might have before.
  • For those with money in savings, the return on your money has fallen — on average — to next to nothing. It’s time to call your financial institution and ask about a high interest rate saving account. No, they’re not paying what they were a few months back, but interest rates in the 1.5% rate are still available.
  • Finally, it is important to understand that a 0% interest rate for the target fed funds does not mean you can get a loan at 0% interest. McBride explains that this is the rate that banks would have to pay if they borrow from each other. The United States Government is still paying 1.4% on the money they borrow — an average consumer can expect to pay more, with mortgage rates averaging around 3.5%-4% right now.

    With Rebecca Cohen

    If you have access to the SavvyMoney credit score application through your financial institution you should be logging in regularly to see potential savings identified for you. If you score goes up or you interests drop, you can see what savings you may qualify for today.

    Jean Chatzky

    Jean Chatzky