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Four Ways an Interest Rate Cut Can Affect Your Finances

Four Ways an Interest Rate Cut Can Affect Your Finances

  • 03.03.20
  • Economy & Policy
  • Article

The interest rates that shape the economy and your finances are dropping.

Federal Reserve Chairman Jerome Powell, the nation’s top financial policy maker, and the Federal Open Market Committee (FOMC) unexpectedly cut interest rates by half a percentage point on March 3 in response to the growing threat the coronavirus poses to the U.S. and global economies. The surprise move is the first emergency rate cut since the 2008 financial crisis and is also the largest since then. The Federal Funds Target Rate sits between 1% and 1.25% and is important to consumers as it sets the basis for what banks charge other banks to borrow money, and is the starting point for many consumer-facing interest rates like credit cards and auto loans.

Interest rates deeply impact Main Street. Here are four common ways that lower rates might impact you.

1. Mortgages and vehicle loans

When the Fed reduces rates, some investors assume they’ll see an equivalent drop in mortgage and car loan rates – but that dynamic is more complex, especially when a rate cut was sparked by volatility. Generally, mortgage rates won’t fall as fast as Treasury yields, so refer to your bank to see when (or if) their rates adjust.

2. Bond values

When interest rates drop, yields drop, and the price of existing bonds increases on the resale market. Keep in mind that if bonds are held to maturity, their full principal value is returned – subject to the creditworthiness of the issuers.

3. Student loans

Most student loans issued by the federal government are tied to the 10-year Treasury note, a debt instrument issued by the U.S. Treasury department. Here too, lower interest rates mean you’ll pay less to borrow money for school.

4. Savings accounts and CDs

This is one area where lower interest rates are bad news for consumers. With rates dropping, you’ll likely earn less interest on your savings. Interest rates on CDs are usually fixed at the time of purchase.

Contact your financial advisor for more information on how interest rates play a role in your investment portfolio and financial plan.

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