Recession fears could shape consumer opportunities again in 2021.
As with so much of 2020, political overtones are creating some drama before the next FOMC meeting - although the outcome for consumers would likely be the same with or without the drama.
With virtually no room for further interest rate cuts, the Fed meeting set for December 15 and 16 would normally be a fairly low-profile affair. However, a recent tug of war between the Federal Reserve and the Treasury Department is raising the stakes a little.
While there are long-term implications to the dispute between the Federal Reserve Board and the Treasury, consumers who want to improve their finances in 2021 should focus on the fact that the Fed will likely keep interest rates near zero at the end of next week's meeting, and no change in that policy is within sight.
The prospect of continued low interest rates should inform consumer decisions about their savings and borrowing needs.
Treasury Pulls Billions in Emergency Funds from the Fed
With interest rates already near zero, there is little the Fed can do in terms of an interest rate cut to combat the recession. So the Fed has been concentrating on providing emergency credit for much of this year, to make sure that lending would not dry up.
This effort was supported by a pledge of $195 billion in funds from the U.S. Treasury, of which roughly half has already been delivered to the Federal Reserve.
However, in November, Treasury Secretary Steve Mnuchin announced that much of the emergency lending program would be allowed to expire on December 31 and that the Fed would have to return $70 billion in funds that had not yet been used.
Treasury Secretary Mnuchin's announcement was controversial because it seemed to take the Fed by surprise. There had been talk about extending the program, and the Fed initially responded to the announcement by arguing that they would prefer to continue to have the funds at their disposal in case they become necessary.
It remains to be seen how much of an impact ending this program will have on the availability of loans to businesses, municipalities and individuals.
On the one hand, the Fed had used just a fraction of the funds that had been made available for emergency lending, because the demand for loans proved to be less than anticipated.
On the other hand, announcement of the program earlier in the year did seem to calm jittery credit markets. When lenders get nervous, they are less likely to make loans. Just the existence of the Fed's program, even if it was under-used, may have given lenders the reassurance they needed to keep lending.
A Changing Partnership Between the Fed and Treasury
The Fed and the Treasury seemed to be working together in their initial reaction to the pandemic, just as they had done in response to the Great Recession. The apparent disagreement over extending funds for emergency lending marks a change in that spirit of cooperation.
Aside from this disagreement over tactics, the dispute also highlights the question of the Fed's independence. The Fed is supposed to operate independently from political pressure, while the Treasury Department is part of the Executive Branch of the federal government.
The move to discontinue emergency lending funds demonstrates the Treasury exerting some control over Fed policy. On the other hand, the need for those funds may have already made that influence inevitable.
The dynamic is likely to change again next year when a new Treasury Secretary takes over. Janet Yellen, who is expected to be President-elect Joe Biden's nominee as Treasury Secretary, served as Federal Reserve Chair from February of 2014 to February of 2018.
Not only should that experience give Yellen an especially deep understanding of the Fed's operation, but history suggests she leans in favor of policies to stimulate the economy. During her tenure as Chair, the Fed was very slow to raise interest rates during the last economic recovery.
Consumers Should Consider the Credit Impact
Let's say you were thinking about borrowing money in 2021 - a mortgage, car loan or personal loan, perhaps. In that case, another year of ultra-low interest rates should be good news, right?
The one concern you should have is that the reason rates are so low is because of the recession. A weak economy makes lenders more cautious about lending, so loan qualification standards could become tougher.
Having the Treasury Department withdraw support for the Fed's emergency lending programs could further tighten credit.
What this means for consumers is that, if you plan to borrow in 2021, you'd better work on maintaining the best credit score possible. Without that, you may not be able to take advantage of the low interest rate environment.
What to Do About Another Year of Near-Zero Interest Rates
While borrowers who can get credit would benefit from another year of low interest rates, keeping rates near zero would cost consumers with savings in the bank.
By the end of the third quarter of 2020, the average savings account rate was less than half what it had been when the year began. Money market rates, 1-year CD rates and 5-year CD rates have all suffered similarly drastic declines.
Unless you want to accept your savings earning half as much as they did before, you need to fight back against the falling rate environment. Here are two ways you could actually raise the rate you earn even while banks are cutting rates:
- Consider a long-term CD
If there is part of your savings you don't anticipate needing for a while, consider putting it in a CD instead of a savings or money market account.
If you are already in a CD, consider choosing a longer term the next time you roll it over. Though CD rates have fallen, they are still typically higher than savings or money market rates, and long-term CD rates are usually higher than short-term CD rates.
- Actively shop for better interest rates
Whether you choose a savings account, money market account, or a CD, shopping around pays off - literally. There is a wide gap between the best rates and average rates; so if you want to earn more in 2021, take a few minutes to shop for a better rate.
Money is especially tight in a recession. At the same time, the recession compels the Fed to keep interest rates low. Despite that policy, you could probably put some extra dollars in your bank account my making one or both of the simple moves described above.
Previous Federal Reserve Board Updates articles:
|FOMC Date||2020 FOMC Meeting Update Articles|
|10/28/2020||FOMC Meeting Preview: What to Expect after the Election|
|09/09/2020||Fed Meeting Preview: Loosening the Reins on Inflation|
|07/23/2020||Next Federal Reserve Meeting: Consumers Have More Options Than the Fed|
|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?|