What Do Zero-Percent Interest Rates Mean for You?
The coronavirus pandemic has launched the country, and the world, into uncharted territory. In much of the world, society is essentially shut down. Schools and large events are closed. People are staying in their homes. Businesses have effectively closed across the country.
The economy has felt the impact of the pandemic. Stocks have declined significantly, and unemployment has surged. On March 3, the Federal Reserve took action by cutting the fed funds rate to 0%. The Fed expects to maintain this rate until “it is confident that the economy has weathered recent events.”1
Given the unpredictability of the current pandemic, it’s hard to say how long rates might be at zero or how the economy may change in the future. However, changes to the fed’s benchmark rate often have ripple effects throughout the economy. Below are some things you may want to consider as we navigate a zero-rate environment for the near future:
Debt
Many common types of debt are tied to the prime rate. For instance, if you have a credit card with a variable interest rate, it could fall soon. If so, this may be a good time to get that balance paid off. You also may see lower rates on things like car loans and mortgages. This could be a good time to rate shop, especially if you have good credit. Even if you don’t want to transfer a credit card balance or refinance a home, the prospect of doing so could be enough to convince your lender to reduce your rate.
Student loan rates could also be impacted. Rates for new federal student loans are adjusted every year. The rate for 2019-20 is already set, but the rate for next year could drop significantly if rates stay low for some time. Private student loan rates could be fixed or variable. It depends on the terms of your loan agreement.
Savings
Savers have unfortunately been used to low-interest rates for some time. Interest rates on savings accounts had started to climb, but after the Fed’s cut, the average FDIC rate is now down to 0.09%. While CDs may offer higher rates, they also come with less liquidity.
It’s always advisable to have liquid savings available to cover emergencies and unexpected costs. However, it may be difficult to find interest-bearing accounts for those savings at this time. We can help you explore all your options and develop a liquidity strategy that’s right for your needs and goals.
Investments
There’s a misconception that a Federal Reserve rate cut always leads to gains in the stock market. One need looks no further than the most recent cut to see that it’s not true. When the Fed cut rates on March 3, the Dow Jones Industrial Average fell nearly 800 points.2
These are unprecedented times and it’s impossible to predict when the pandemic will end or how it will fully impact investors. While interest rates are a factor, there are many others to consider. Your retirement income strategy should be based on your unique needs and goals.
Now could be the right time to review your strategy and make adjustments. A change in allocation could be appropriate. You also may want to take advantage of financial vehicles that limit your exposure to risk. A financial professional can help you find the right strategy for your needs.
