Concern about a possible recession has ramped up interest in next week's Federal Reserve meeting.
Rather than worrying about what the Fed might do, though, consumers would be better served by figuring out what money moves they should make to protect against the next recession.
Uncertainty Shapes Context for Upcoming FOMC Meeting
The direction of Fed policy changed at the last Federal Open Market Committee (FOMC) meeting, which concluded on August 1. After nine consecutive rate increases from December of 2015 through December of 2018, the Fed cut interest rates by 25 basis points.
Since that last FOMC meeting, concern about the health of the economy has only increased. While the unemployment rate remains very low, job growth has been tepid in recent months. Recent job weakness in durable goods manufacturing and housing suggests weakening conditions may be ahead for the economy as a whole.
On a broader front, economic growth is slowing in many parts of the globe. Uncertainty over Brexit - Britain's exit from the European Union - has cast a chill over economic activity in the United Kingdom and on the Continent.
Meanwhile trade wars, most notably between China and the United States, have many U.S. businesses concerned about their markets and supply chains.
Between fears of recession and unresolved issues such as Brexit and the trade wars, the recurring theme is uncertainty. That uncertainty only makes economic conditions worse. When people aren't sure what's going to happen, consumers are less likely to spend and businesses are less likely to invest.
Why Do Fed Rates Change?
So what do fed rates have to do with all this?
Interest rates are a key monetary policy tool the Fed uses to try to keep economic growth in line. Too little growth means the economy could lapse into recession and unemployment would rise. Too little growth could cause a spiral of price increases resulting in high inflation.
Interest rates are used to try to maintain a balance where growth is just strong enough to encourage employment but not so strong as to cause inflation. When interest rates are low, it is cheaper for individuals and businesses to borrow, so this encourages spending and economic growth.
When interest rates are higher, borrowing becomes more expensive so it discourages spending.
While that sounds bad, higher interest rates can help cool off inflation and calm down financial speculation.
In short then, when the Fed wants to pump up the economy a bit, one option is to cut interest rates. On the other hand, if they want to rein in inflation, then a Fed rate hike is a possibility.
Will There Be Another Fed Rate Cut?
Given growing concerns about the economy, another Fed rate cut is certainly a possibility for the upcoming FOMC meeting. However, it is by no means a sure thing.
Because monetary policy is not an exact science, the Fed tends to raise or lower interest rates gradually. Rather than making a big change all at once, they prefer to make a series of small changes so they have a chance to see what effect their actions are having.
There is little reason to believe the economy has improved since the last Fed meeting. Until it does, further rate cuts are a possibility. Again, the Fed is cautious, so it's more likely to make a series of small changes rather than just one isolated change.
Still, that same caution may cause the Fed to wait a meeting or two before making its next rate cut.
For example, when the Fed was steadily raising rates in 2018, it fell into a pattern of raising rates at every other meeting. A similar amount of caution suggests that, even if further rate cuts are to come, the Fed might wait a little before making the next cut.
Could Fed Rate Cuts Affect Your Bank Account?
If you have money in a bank, one thing to worry about when the economy slows is the prospect of falling interest rates reducing the amount of interest your deposits earn each year.
This can happen whether or not the Fed cuts interest rates.
Generally, Fed decisions are just reactions to economic conditions that are already playing out in the financial community. For example, while the Fed just made its first rate cut at the beginning of August, Treasury bond yields have been falling since late last year.
Similarly, when bankers are deciding what rates to offer their customers, they don't have to wait and see what the Fed does.
Notably, the MoneyRates America's Best Rates survey found that the average savings account rate declined slightly in the second quarter of 2019, well before the Fed cut rates.
The bad news is this means that your bank rates might fall even before the next fed rate cut.
The good news is that, since bank rates do not directly depend on the Fed, there are things you can do to protect the interest you earn - or even improve it - despite any future fed rate cuts.
What You Can Do About Recession Fears
Here are two moves to consider in this environment:
- Shop for rates
Bank rates do not all move as one. In fact, there are huge differences between what different banks offer.
For example, in the last America's Best Rates survey, MoneyRates found a difference of nearly 2% between the top savings account rate and the average rate. This means that most bank customers could improve their interest rate by shopping around - even in a falling-rate environment.
- Go long if you can
If you believe a recession is likely, then you should also recognize that interest rates may continue to decline.
That might make this a good time to lock in today's rates if you can.
Unless you expect to need the money in the near term, consider shifting at least some of the money in your savings or money market accounts to a CD. If you already have a CD, consider rolling it into a CD with a longer term when it matures.
There is a good chance of another fed rate cut at next week's meeting, but it is far from a sure thing. You don't have to wait for the Fed to act before you make a move to secure or even improve your bank interest rate, though.
With the overall rate trend being downward, failing to take action on your bank accounts may well cost you money in the year ahead regardless of what the Fed does next week.
Previous Federal Reserve Board Updates articles:
|FOMC Date||2019 FOMC Meeting Update Articles|
|08/01/2019||July 2019 Fed Meeting Raises New Questions|
|06/20/2019||Consumers Not Limited by Fed's Rate Decision|
|05/2/2019||Federal Reserve Pursues Rate Stability|
|03/21/2019||Shifting Stance: Fed Implies No Rate Increases in 2019|
|1/31/2019||Fed's Low Profile Won't Stop Interest Rates from Rising|
|FOMC Date||2018 FOMC Meeting Update Articles|
|12/21/2018||Expect more stable Fed rates in 2019 after latest hike|
|11/11/2018||Look for bank rates to move even as Fed stands pat|
|9/26/2018||September 2018: Rate hike may hurt more than help consumers|
|8/1/2018||Banks aren't waiting for Fed rate increases|
|6/13/2018||Your strategy when the federal funds rate rises|
|5/2/2018||Interest rates surge despite Fed's inaction|
|3/21/2018||Fed rate increases not helping consumers|
|1/31/2018||3 ways to profit when market rates outpace the Fed|