The Federal Open Market Committee is expected to leave interest rates unchanged when it meets on July 28 and 29.
If you think no change makes this meeting a non-event, guess again.
Under the circumstances, leaving the fed interest rate unchanged does not represent stability. Instead, it is a result of an economic environment that poses serious risks to consumers.
And yet, while the Fed's interest rate options may be limited, there are still moves you can make to help your own finances.
Understanding how this economy affects your financial position can help you make better decisions when it comes to things like choosing a savings account and getting a mortgage.
Fed Interest Rate: Pedal to the Metal
Normally, with the economy already in recession and facing further uncertainty, you might expect a fed interest rate cut at the next FOMC meeting.
That's not an option in this situation.
The current fed interest rate is around 0.10%. Having that rate pinned so close to 0% means the Fed already has the pedal to the metal in terms of its normal means of boosting the economy.
Since a traditional rate cut is out of the question, the Fed is adding new tools to help the economy. These include buying bonds to push long-term rates down and facilitating lending to help keep businesses and other organizations afloat through the crisis.
The Economy: Weak and Unstable
The Fed went into this crisis with interest rates far below normal. Not only has that reduced its options, but the Fed's decision-making has been complicated by just how unpredictable economic data has been.
The two main aspects of the economy that the Fed tries to manage are the job market and inflation. The table below shows how both have swung from one extreme to another in recent months:
|Month||Net Change in Jobs||Inflation (CPI)|
When it's all said and done, these numbers amount to a record-setting loss of jobs and a significant decline in consumer prices.
It's a testament to just how weak the economy is, and the erratic behavior of these numbers suggest the economy is not just weak but also very unstable.
While an optimist might say that the most recent figures indicate a turn for the better, keep in mind that there have been recent outbreaks of COVID infections in areas that were most aggressive about reopening their economies. This has forced many of those areas to backtrack on reopening, so July's economic numbers seem likely to show a turn for the worse.
What this Means to You: Consumer Finances in the COVID Economy
In many ways, 2020 has been disorienting - if not surreal - and the impact of the COVID economy on consumer finances can seem strange as well.
Theoretically, low interest rates and falling prices are good for consumers. The problem is, they are a bit of an illusion given everything else that's going on with the coronavirus pandemic.
- Uncertainty negates low interest rates
Low interest rates are great for those consumers who still have the confidence to borrow for major purchases at this time - but many people do not feel comfortable taking on debt under these circumstances when their incomes are so uncertain.
- Low prices offer no help amid unemployment and restrictions
Falling consumer prices are less help to consumers when nearly 18 million Americans are unemployed. Seeing prices drop by less than 1% is of little comfort when your primary income has been lost.
Even for people who continue to work, lower prices are of less use when there are so many restrictions on how you can spend your money.
- Good credit can help
Also, there is concern that bankruptcies will soar as the recession drags on. This will make credit harder to get for anyone except those with excellent credit. Borderline cases may have to pay higher interest rates to get credit.
Tips on Using Financial Products in These Uncertain Times
This combination of low interest rates with high economic uncertainty means consumers need to rethink how they approach financial decisions.
Here are some tips on how to approach some financial products in this environment:
Checking account fees have been rising for some time now, and monthly maintenance fees now total an average of $170 per year.
If your budget is tightening, that's money you can ill afford to simply hand over to your bank. The good news is that you don't have to.
While most checking accounts charge a monthly maintenance fee, there are still several that don't. In particular, online checking accounts generally do not have monthly fees so it is worth looking at one of these if you want to save money.
Savings and money market accounts
As you might expect, interest rates on savings and money market accounts have fallen sharply in recent months.
The good news is there are still opportunities for most bank customers to raise their rates rather than accept less interest.
There is a huge difference between the leading bank rates and the average. In particular, the largest banks typically offer dismally low interest rates that are not competitive with what you can find elsewhere.
Fees can negate interest earned
The low-interest-rate environment is made worse when banks charge fees on these accounts. A recent MoneyRates.com study found that most savings accounts are now charging monthly fees. For small accounts, those fees would far exceed the interest they would earn.
Fortunately, not all savings accounts have these fees. For example, only 9% of online savings accounts charge monthly service fees.
If you want to put more money in your pocket when it's needed the most, shop for higher savings and money market rates, and avoid accounts with monthly fees.
Certificates of deposit (CDs)
With interest rates falling, this might seem like a good time to lock in a rate with a long-term CD. Unfortunately, banks have acted quickly to slash rates on CDs.
A CD ladder can give you some of the benefit of long-term CD rates without locking all your money in while rates are down.
Because most CDs have fixed rates, it's especially important to compare CD rates before choosing. Any rate advantage you get will last for the full term of the CD.
Mortgages and refinancing
Mortgage rates are down, which is good if you want to buy a house.
Just think first about whether your job is secure and your skills are competitive enough to stay employed before making this kind of long-term commitment.
If you're thinking about taking advantage of low rates by refinancing, you might be wise to act soon. Rates are low now; but if mortgage defaults pick up as the recession drags on, it might be tougher to obtain a new loan.
If you want to take advantage of low rates on credit cards, be sure to maintain your credit quality. If you have weak credit, you won't get anywhere near close to the best rates credit card companies advertise.
Previous Federal Reserve Board Updates articles:
|FOMC Date||2020 FOMC Meeting Update Articles|
|06/04/2020||Will the Next Fed Meeting Lead to Negative Interest Rates?|
|04/23/2020||The Federal Reserve in Crisis: What's Next?|
|03/12/2020||Next Fed Meeting Won't Solve Global Economic Crisis, But Here's What Consumers Can Do|
|01/22/2020||January 2020 Fed Meeting - More Than Meets the Eye?|