How the Fed’s decision to keep interest rates low is affecting your wallet

Federal Reserve Chairman Jerome Powell speaks at a virtual press conference in Tiskilwa, Illinois on December 16, 2020.

Daniel Acker | Bloomberg | Getty Images

The Federal Reserve held its key interest rate at zero on Wednesday to further support the economic recovery from the coronavirus pandemic.

The decision is made just days after the US $ 1.9 trillion rescue plan was signed. This is another incentive to stimulate the US economy.

In addition, vaccinations are on the rise – more than 110 million Americans have received the Covid-19 vaccination to date, according to the Centers for Disease Control and Prevention. And soon more adults can be vaccinated. In a March 11 speech, President Joe Biden urged all states to qualify all adults for the vaccine by May 1.

Despite the economic recovery, the central bank is determined to support the recovery. That means historically low interest rates are likely to last for a while. The Fed announced on Wednesday that a rate hike is unlikely until 2023.

“They’ll hold on to their guns this time around and won’t raise interest rates prematurely,” said Robert Frick, corporate economist with the Navy Federal Credit Union.

While the federal policy rate isn’t what consumers pay – it refers instead to what banks charge each other for short-term loans – it does have an impact on what you pay for different types of loans.

A good time to find a mortgage refinance

Consumers can save money by refinancing existing debts at a lower interest rate. For example, mortgage rates, which loosely follow the 10-year US Treasury bond, have been one of the beneficiaries of the Fed’s rate changes over the past year.

Still, mortgage rates have risen in the past few months after hitting their all-time lows, putting pressure on anyone holding back on refinancing to get there anytime soon.

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“If you’ve put off refinancing, it’s time to act,” said Greg McBride, a financial analyst at Bankrate.

Even if you missed the all-time low, it’s important to remember that current mortgage rates are still very high, Frick said.

“People have been spoiled by loans below 3%,” he said. Tuesday’s popular 30-year fixed-rate mortgage had an interest rate of 3.38%, according to Mortgage News Daily.

Other loans can also be refinanced

In addition to mortgages, people can also save by refinancing car loans, which Frick says is often overlooked. For those with the best credit scores, the interest rates on a new car loan can be as low as 4.08%, according to Bankrate.

“It doesn’t take nearly as long as refinancing a mortgage,” said Frick. “If you can save yourself $ 1,000 just for a bit of paperwork or more, this is what you should do.”

In addition, new credit cards can have lower interest rates and banks can offer lower interest rates on personal loans, according to Tendayi Kapfidze, chief economist at LendingTree. For borrowers with excellent credit, the average personal loans are between 10.3% and 12.5% ​​according to Bankrate.

“Lenders became very conservative last year, but things relaxed a bit,” said Kapfidze.

That means people could potentially save by consolidating credit card debt or paying it off with a cheaper personal loan.

Those with student loan debt may also be able to take advantage of the environment and refinance at a lower interest rate. However, this is only a good idea if you have personal loans that have not been put on hold by the lender – federal loans are currently on hold due to the coronavirus pandemic.

“Act now – if not, leave money on the table,” said Kapfidze.

A moment for personal finances

Of course, low interest rates aren’t good for everyone, especially savers, Frick said.

In fact, brick and mortar banks generally offer savers an average annual return of 0.7% on deposit accounts, while online banking rates tend to be slightly higher.

Still, some consumers could be in a unique position to review their balance sheets in the coming weeks, given the low interest rate environment, the third round of economic activity, and the fact that it’s tax season, meaning that refunds are on the way too, for many Americans.

Act now – if not, leave money on the table.

Believe repentance

Chief Economist at LendingTree

“For many households, they’re going to have one, maybe two, big problems here in the coming weeks,” said McBride. “These are two great ways to make a real difference in your finances.”

This probably wouldn’t affect those hardest hit by the pandemic and struggling to get through, Frick said. But those who kept their jobs and were able to cut their expenses could stand a great chance of resetting their finances by paying off debts and increasing savings.

“This is a game changer,” he said.

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