The Federal Reserve reduced interest rates today, cutting the federal funds rate by 0.50 percent to a range of 1-1.25 percent. The Fed is trying to stay ahead of disturbance and economic slowdown caused by the fast spreading coronavirus.
On Friday, the Fed announced that it was willing to support the economy with accommodative interest rates.
The latest rate cut is an emergency measure that underscores the Fed’s commitment to keeping the economy on track, as the virus and the aggressive response to it cause an economic slowdown to percolate through the global economy.
The reduction is the Fed’s first rate cut in 2020, after a series of three smaller cuts in 2019 that were meant to support a somewhat slowing economy and balance other threats to growth, such as trade tensions with China. Many Fed watchers had anticipated the substantial 0.50 percent cut, given the Fed’s statement on Friday.
Lower rates encourage more money into the economy, inducing businesses to invest and consumers to spend and borrow. That keeps money flowing through the economy.
While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield,
they’re often moving the same way for similar reasons.
In 2018, the Fed raised rates on the belief that a stronger economy could handle higher rates, and mortgage rates climbed as well during much of that period. As investors began to anticipate a slower economy, they pushed the yield on the 10-year Treasury lower in 2019 and 2020, and that hit mortgage rates well before the Fed even acted.
A home equity line of credit (HELOC) will adjust relatively quickly to the lower federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. So when the Fed adjusts its rates, the prime rate usually follows immediately.
Lower rates uplift more money into the economy, prompting businesses to invest and consumers to spend and borrow. That keeps money flowing through the economy.
However, while lower interest rates help some groups, they don’t help everyone. Here’s who stands to benefit the most from lower rates, and also who could be hurt by them.
While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons.
In 2018, the Fed raised rates on the belief that a stronger economy could handle higher rates, and mortgage rates climbed as well during much of that period. As investors began to anticipate a slower economy, they pushed the yield on the 10-year Treasury lower in 2019 and 2020, and that hit mortgage rates well before the Fed even acted.
A home equity line of credit (HELOC) will adjust relatively quickly to the lower federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. So when the Fed adjusts its rates, the prime rate usually follows immediately.
Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. So as the federal funds rate changes, interest on variable-rate cards is likely to quickly adjust, too.
“Credit card rates will move lower for most cardholders, but more slowly than they’d increased when rates were rising,” says McBride. “Don’t expect to see that lower rate on your account for another 60 to 90 days, as issuers drag their feet on passing along lower rates.”
The latest Fed move will likely lower interest rates on auto loans. While auto loans are influenced by the direction and trend of the federal funds rate, they don’t move in lockstep.
Lower interest rates are generally a positive for the stock market. Lower rates make it cheaper for businesses to borrow and invest in their operations, and so companies can expand their profits at a lower cost. In addition, lower rates make stocks look like a more lucrative option for investors, so stock prices tend to rise when rates are cut, if the economy looks strong otherwise.
The stock market tends to price in the potential for a rate cut sometimes weeks or months before it actually takes place. In this case, the S&P 500 soared 4.6 percent the day after the Fed made it clear that it was willing to lower rates and the day before it actually did so.
With the market expecting some economic weakness due to the coronavirus and unemployment sitting near historic lows, you’ll want to consider how much longer the economy’s expansion can continue. When the economy enters a recessionary period again, rates should fall, so it may make sense to make your money moves (such as locking in higher CD rates) while you can still receive relatively higher yields.