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What to Expect at the January Fed Meeting

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At its January meeting, the Federal Open Market Committee (FOMC) will continue to emphasize its commitment to supporting the U.S. economy and financial stability, given recent weakness in economic data as COVID-19 cases have surged following the holidays. The Fed may seek to reassure markets by reiterating its forward guidance, as concerns emerged that it would raise interest rates if inflation spikes.

Here’s an overview of what to expect from the Fed this week:

General economic support

To combat the economic contraction caused by the COVID-19 pandemic, the Fed has vastly expanded its influence on the economy. It launched and further expanded credit facilities to purchase most types of financial instruments and created special lending facilities, including ones for small businesses.

The U.S. is currently facing three acute challenges: the public health crisis, the economic crisis and a potential financial crisis as a result. The Fed’s actions help inoculate the financial system, while the committee also supports the economic recovery once there are impactful interventions in slowing the spread of coronavirus cases. As vaccine distribution ramps up, there’s hope that the public health crisis will be contained and economic interventions will have a greater impact.

The Fed will seek to reassure financial markets that it remains committed to providing support to the economy and may attempt to assuage concerns about inflation leading to rate increases.

Mortgage rates are unlikely to go much lower

The Fed’s impact is most directly seen in the housing market. The Fed drove mortgage rates lower in 2020 through its policy of asset purchases, or quantitative easing. This helped support housing demand and sales rose to a 14-year high.

Mortgage rates are unlikely to fall much further. The current spread between mortgage and 10-year Treasury rates of 167 basis points (bps) is now close to the pre-pandemic average of 170. This suggests there’s less room for mortgage rates to fall lower without corresponding declines in the 10-year Treasury. Nonetheless, rates are also not likely to increase meaningfully and should continue to sustain robust housing demand.

Consumer market seeing favorable rates, but lending standards are tight

The Fed influences a lot of other consumer rates. For example, any movement in the federal funds rate impacts credit card, personal loan, auto loan and home equity interest rates. When the Fed lowers its rate, interest rates on these products typically fall, too. This makes borrowing cheaper and helps to stimulate the economy.

To help deal with the current economic crisis, the Fed has cut its benchmark rate to zero. Though this means lower rates for many of these products, the intensity of the crisis also means that loan availability is declining so the boost to the economy is muted.

Tips for borrowers to weather the storm

  • Review all of your debts to see if there are opportunities to save money. For mortgages, consider refinancing to a lower rate or shorter loan term. For other products, consider switching to a lower-cost loan, such as using a personal loan to consolidate and pay off high-interest credit cards.
  • Home-price gains mean many homeowners have seen an increase in equity and now have more room to borrow. Consider a home equity loan or cash-out refinance to pay off high-interest debt. You may significantly lower your overall debt costs.
  • Not all providers pass through Fed rate changes at the same time or to the same extent. The key to fully benefiting from the Fed’s actions is to compare rates from different lenders across all financial products to find your best deal. Doing so could save you thousands in interest costs — and better help you ride the waves of this economic storm.