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The Federal Reserve: The Lender of Last Resort

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LendingTree Chief Economist Tendayi Kapfidze shares his insights on how current market conditions will impact consumers.

“The lender of last resort” is a popular moniker for the Federal Reserve. We are finally here at the last resort.

The Fed today announced extensive new measures and expanded previous economic relief programs, which extend credit to employers, consumers, businesses and municipalities. The Fed also preannounced an upcoming credit facility for small and medium-sized businesses.

What do the Fed’s actions mean for the economy?

Most of these measures won’t alleviate the current challenges in the economy, with both demand and supply shocks due to the measures taken to combat the COVID-19 coronavirus. The emergency actions enable individuals, families, companies and municipalities to endure the crisis and emerge on the other side in a better position to participate when the economy recovers.

Without these measures, there would likely be widespread business failures and consumer loan defaults. These issues would reverberate throughout the financial system and impede the economy’s recovery, further weakening it. As a result, many jobs would disappear, making an eventual recovery more difficult.

The Fed is attempting to inoculate the financial system from negative effects from the real economy, which, in turn, will shield the economy from negative effects from the financial markets in the future. The Fed’s actions also include the possibility of full monetization of U.S. government debt. This increases the ability of Congress to enact a fiscal stimulus.

What does this mean for consumers?

Consumer financial markets should continue to function seamlessly — for now. The Fed’s liquidity support (by injecting cash into the economy) means that the cost of credit should decrease. Consumers should take advantage of this by evaluating their debt profile and looking for opportunities to save.

Here are some areas to consider:

  • A mortgage refinance is an obvious opportunity to explore, but most types of consumer debt can be refinanced. Refi rates are still near historic lows, but many lenders are facing increased volume, so closing times might be extended.
  • A credit card balance transfer or personal loan can refinance debt from an existing credit card to a lower interest rate.
  • An auto loan can be replaced with another auto loan or a home equity loan with lower rates.

Bottom line

With so many moving parts, not every financial institution will react immediately or to the same extent. It’s more important than ever that consumers shop around and find themselves the best deal. Doing so could save you thousands and help you weather this economic storm.

Financial regulators also announced measures that make it easier for banks and lenders to allow consumers to defer or modify their monthly debt payments. If you’re concerned about meeting your obligations, call your lender sooner rather than later. Many lenders would rather work with you than have you go into default. Find out if you can get a lower rate in addition to deferred payments.


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