The Fed keeps rates close to zero – here’s what it means for your portfolio
“The Fed has lowered interest rates as low as possible without going into negative rates,” said Greg McBride, chief financial analyst at Bankrate.com. The economic shock of Covid-19 may require drastic measures, but negative interest rates aren’t one of them – at least not yet.
In addition to cutting interest rates to near zero, the central bank also said it would continue to increase its bond holdings to preserve the flow of credit.
Along with the rate decision, central bankers predicted on Wednesday that the economy would shrink 6.5% in 2020. However, the Fed said 2021 is expected to post a gain of 5% followed by 3.5% in 2022. .
With millions of people without work and a growing number of Americans feeling cash strapped, historically low borrowing rates mean loans are cheaper – if you can get them.
Although the federal funds rate, which is what banks charge each other for short-term borrowing, not the rate consumers pay, the Fed’s actions still affect the borrowing and saving rates they see every day.
For example, credit card rate fell to a four-year low of 16.01% from a high of 17.85% when the Fed began cutting rates last July, according to Bankrate.
“Card interest rates are already at the lowest levels we’ve seen in years, but they’re still high,” said Matt Schulz, chief industry analyst at CompareCards.
In addition, as conditions worsened, credit card issuers began to close accounts and lower credit limits, especially on accounts that are more at risk of becoming delinquent.
“The banks are tight with all loans right now as they step foot under them in the wake of the recession,” said Schulz.
The 30-year average fixed rate is now at an all-time high of 3.47%, according to Bankrate. However, some lenders have stopped offering certain refinancing options and jumbo mortgage programs, due to the new market risk associated with the mortgage. mortgage bailout program, part of the CARES Act.
“Credit is tightening, so while rates are at record highs, fewer borrowers can take advantage,” McBride said.
Although the Fed does not have direct influence on deposit rates, these tend to be correlated with changes in the target federal funds rate.
Today, according to the Federal Deposit Insurance Corp., the average savings account rate is only 0.06%, or even less, at some of the largest retail banks.
Exclusively online banks such as Marcus by Goldman Sachs and CIT Bank still offer slightly higher returns, in part thanks to lower overhead costs than traditional banks. However, these rates are also falling.
“Online savings account rates have fallen to almost 1% after less than three months of the Fed’s new zero-rate policy,” according to Ken Tumin, founder of DepositAccounts.com.