What the Lower Federal Rate Means to Consumers

by Jul 28, 2020Blog

As a result of the economic slowdown caused by the pandemic, the Federal Reserve slashed interest rates by as much as a full percent. This emergency response can bring with it both risks and rewards. Here’s what consumers need to know about saving, spending, and borrowing.


The breakdown

The Federal Reserve and its policymaking branch, the Federal Open Market Committee, are tasked with controlling the growth and size of the economy by way of interest rates. The committee sets meetings eight times throughout the year to discuss the federal funds rate or interest rate that banks pay each other to borrow. During extraordinary circumstances, it also makes decisions in response to national (or, in this case, global) emergencies. This is the second time in the last decade rates have been cut.

The risks

At the same time, consumers will earn less interest on their savings accounts and certificate of deposit, possibly affecting buying power over time by getting money out of the banks and into the economy. Higher deposit rates will then take a hit after the annual percentage yield that banks pay to customers for their money sat at the bottom. Alternatively, online banks can offer higher-yielding accounts because they come with fewer overhead expenses than traditional banks. What’s more, due to the ongoing trade war, prices could be raised on many everyday products.

The rewards

When rates go down, borrowing becomes cheaper, making large purchases on credit more affordable. Consumers will typically see a decrease in credit card rates, home equity lines of credit, variable rate student loans, and small business loans, opening up the flood gates for consumption and stimulating the economy for those who have the means. This makes it a good time to pay off debt or refinance existing loans, as well as start new ones. While the savings won’t be a one-to-one ratio that correlates with the prime rates, the pay-off will be noticeable in the long run.

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