Emergency rate cut from the Federal Reserve caught everyone by surprise this week. For the first time since the 2008 financial crisis, the Federal Reserve announced Tuesday an emergency half-point percentage rate cut in the federal funds (fed funds) rate. Why was this a surprise? In January the Federal Reserve indicated that there would be no additional rate cuts in the near future; however, economic conditions have changed.
Understanding How the Cut Affect You
The federal funds rate is the interest rate banks charge other banks for lending them money from their reserve balances on an overnight basis. You may ask, why do I care? The fact is the fed funds rate affects everything from mortgage rates, credit card rates, to the amount of interest your bank will pay you on certificates of deposit (CD), money market and savings accounts. They use it as a benchmark rate.
How quickly will my local bank change rates?
Years ago, banks would often be slow to react to rate changes, several weeks would pass by before you would see rate changes at your local bank. This would give you some time to make a decision regarding moving money into CD’s if that is a part of your investment strategy; however, now banks are reacting immediately – often within a day or two of the announcement rates have changed. Banks that were offering CD rates between 1.75% – 2.00% in December are now paying 1.2%.
For those of you that currently have money in a fixed rate CD, you will continue to enjoy your interest rate until the CD matures and at that time be prepared for “interest rate shock”. If you currently have monies in a money market or savings account keep in mind these rates often are variable and can change immediately and the rate change can be significant.
What about people wanting to borrow money?
That is a good question. The United States Prime Rate (lowered to 4.25% as of 03/04/20) is often used as an index in determining loan rates both for commercial loans as well as consumer loans such as equity lines of credit. If you have a loan tied to the US Prime Rate index, assuming you do not have a floor, at your next rate adjustment you will see your rate decrease; therefore, paying less interest to the bank.
What about mortgage rates?
Now may be a fantastic time to refinance your current mortgage or decide to purchase that house you have looked at 5 times. Rates were already low before Tuesday and now they will be even better. If you are not sure if now is a good time to refinance or what size mortgage you could qualify for, reach out to your local banker for help! They can run you several scenarios and even get you pre-approved for a mortgage (for no fee) so you will have an idea of the price home can afford.
What can you do to be proactive?
Set up a meeting with me or another Avizo Consultant to talk about your financial options. As a former banker, I am able to quickly gather and explain comparable information to help you make decisions. We also offer Wealth Management services for those who are looking for ways to invest outside of bank deposits.
Diane Anderson, Strategic Relationship Consultant
Diane directs Avizo’s business development efforts. Her background is in banking – after an extensive 25-year career that began while she was still in college and ended serving as Market President – Diane made the switch from banking to business consulting.