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How Will the Latest Fed Meeting Affect Consumers?

| MoneyRates.com Senior Financial Analyst, CFA
min read

fed-update-articleFEDERAL-FUNDS-RATE TARGET: 0.0% to 0.25%


As expected, the Federal Reserve took no action on interest rates at its meeting that concluded on April 29.

With the fed funds rate already being held in a range from 0% to 0.25%, there was little room for another fed rate cut.

Instead, the Fed is focused on other measures to try to maintain economic stability in the face of widespread shutdowns due to the coronavirus pandemic.

If that means that interest rates have hit bottom for the time being, this is a good time for consumers to take a look at where they stand and how they can earn more on their savings accounts, money market accounts and certificates of deposit (CDs).

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Latest Fed Announcement: What the Fed is Doing

Under normal circumstances, the Fed's go-to tactic to revive economic growth would be an interest rate cut.

Unfortunately, as things stand now, there are two problems with that tactic:

  1. Interest rates are already near zero.
    There is little room remaining for a rate cut. While some central banks in other countries have gone to below-zero interest rates, that would run up against the second problem.
  2. Lockdowns don't respond to normal stimulus.
    Low rates encourage people to spend. However, even if people had the means to spend, widespread health restrictions prevent a lot of normal consumer activity.

Having already drastically cut interest rates, the Fed's response to COVID-19 shutdowns is to provide liquidity.

It has taken a number of steps to make credit available to businesses, municipalities and financial institutions. This can help those entities maintain some level of normal financial activity despite severe declines in the economy.

First Quarter GDP Drop is Just the Beginning

Speaking of economic activity, on the same day the Fed meeting wrapped up, the Bureau of Economic Analysis (BEA) released its advance estimate of Gross Domestic Product (GDP) for the first quarter of 2020.

The BEA announced that GDP declined by 4.8% in the first quarter. That's the steepest decline in the US economy since 2008.

The news may well get worse.

The BEA report measured the period from January 1 through March 31. Most of that period was before widespread shutdowns in economic activity.

That means that, barring a miracle, the economy may shrink even more in the second quarter of 2020.

In any case, the first quarter report might not fully reflect the damage to the economy. The BEA advance GDP estimates are often revised significantly in subsequent months.

With all the chaos surrounding the economy these days, it would be understandable if the BEA's data collection methods took a little more time to fully assess the damage. So don't be surprised if there is a downward revision of that advance GDP estimate in the next month or two.

Consumers Can Fight Back Against Falling Interest Rates

The Fed slashed interest rates by 1.50% in March.

Many banks have also cut rates, responding to the Fed's action and the big-picture concern about economic damage caused by COVID-19.

Now that banks have had a chance to digest those developments, this is a good time to take a fresh look at your accounts.

If you don't like the idea of earning less interest this year than last year, there are some things you can do:

  1. Look for interest rate gaps to maximize interest on savings.

    Many banks have adjusted their interest rates in recent months. Some banks reacted less drastically than others, and there was already a huge spread between the highest and lowest rates available.

    If you have a savings or money market account, this is a good time to compare the rate you are getting now with rates at other banks. If you have a CD rolling over, look beyond your current bank to see if you could do better elsewhere.

  2. Switch to online banking. It may be good for your physical and financial health.

    If you've been holding off on switching to online banking, this may be an ideal time to give it a shot.

    To avoid potential exposure to the coronavirus, people are doing more business than ever online these days. When it comes to banking, the sweetener is that online savings accounts pay an average of 16 times as much interest as traditional, branch-based accounts.

  3. Save yourself some bank fees while you're at it

    If the falling rate environment means you are going to earn less interest, you can make up for it by saving on bank fees. Most checking accounts charge monthly maintenance fees, and these fees total an average of nearly $170 a year. However, most online checking accounts do not charge these fees. So switching to an online checking account is a way you could help yourself financially while also protecting your health.

The Fed meeting was just the latest reminder that no one has seen a situation quite like this before. These unusual conditions mean this is no time to settle for banking as usual.


Previous Federal Reserve Board Updates articles:

FOMC Date2020 FOMC Meeting Update Articles
03/19/2020Fed Moves Show Urgency of Coronavirus Response
01/30/2020Fed Rate Decision Means Consumers Have a Choice

 

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