The Fed Rate is on Hold, But You Should Still Review Your Rates on Debt and Savings Accounts
At its June meeting, the Federal Open Market Committee (FOMC) will likely hold its benchmark interest rate between 2.25 to 2.50%. If this prediction holds, the real action will be in changes to the Fed’s statement, as well as the committee’s projections of economic and financial data and the supplemental note about its balance sheet.
In its statement, the FOMC is expected to make note of a slowdown in the economy, evidenced by a weaker business segment and cooling labor market. A key change would be if the Fed removes language about being patient in evaluating the need for changes to the benchmark rate. This would be interpreted as signalling a cut later this year. A more explicit signal of a cut could be contained in the Summary of Economic Projections, which will show the expected Fed Funds Rate at the end of the year.
Several upcoming events will influence the Fed’s actions through year-end. These include the resolution or escalation of trade disputes, as well as the risk that the debt ceiling, expected to be breached in the fall, will trigger another partisan dispute and potentially a government shutdown.
As a result, the uncertainty around the Fed’s path is as high as it has been since the financial crisis.
What does this mean for savers, borrowers and investors?
Savers should have been the big winners since the Fed began raising rates in 2014, with nine hikes totaling 2.25% since then. However, many banks still offer little or no interest on their deposit accounts, as they know that most consumers do not shop around for the best savings rates.
Banks set their rates based on competitive pressures and business strategy, with online banks often offering higher rates that are multiples of the typical rate at a brick-and-mortar bank. Savvy savers should keep a vigilant eye open for opportunities to move their money to higher-paying banks. Even with the pause of the federal funds rate, there are still banks incorporating prior rate hikes in their pricing structure.
Potentially lower rates on loans
The pause in rates means a break in rising interest rates on borrowing for credit cards and personal loans. Auto and student loans are less influenced by short-term changes in the federal funds rate, but should benefit from the expectation that the general level of rates in the economy is at a pause and could fall.
Likewise, mortgage rates are not directly related to the Fed rate, but often react to the same changes in the economy that the FOMC considers in setting its policy. Mortgage rates have declined since November in concert with changing expectations about the Fed, but there is a wide range of rates in the marketplace. Borrowers are often quoted rates that are up to half a percentage point higher or lower than the average rate.
What comes next?
As the debate about the Fed’s path rages, this could spill over into the financial markets. Its important for investors to not overreact to volatility which may be short term in nature. Rather, keep to a long-term asset allocation strategy in line with lifetime and retirement goals.
The Fed pause means the aggregate level of rates in the economy has may not change much over the next few months. However, there is always a wide range in the rates that financial institutions offer the public. Whether you are a saver or borrower, it’s imperative to shop for money as diligently as you shop for any other product.
Getting the best deal regardless of the overall level of interest rates improves your financial well-being. It is always important, and can be significantly beneficial, to look at many different banks lenders regardless of whether the Fed is raising rates, lowering rates — or holding them steady, as they are expected to do at their June meeting.