This week, in an anticipated move, the Fed lowered the Fed Funds rate in order kick-start what was seen as a global economic slow-down. President Trump has asked the Fed to lower interest rates even further, not satisfied with the quarter point rate cut the Fed provided. As a matter of fact, the President appears to favor rates near zero or even dipping into negative territory. While that hypothetical situation is possible, the more immediate question is how the latest rate cut impacts consumers right now?
Little effect on mortgages
Mortgages are not tied to the Fed funds rate, which is the inter-bank rate that banks lend to each other. The mortgage rates are most commonly tied to the 10-year Treasury, which is not directly impacted by Fed actions. However, Treasuries are subject to market pressures, and instability in the markets caused by a variety of factors, including Fed actions, could continue to drive rates lower. It could take some time to see how the Treasury market ultimately responds to various pressures.
Prime rate borrowing rates decrease
Any credit products that track the Prime interest rate will dip lower. Credit cards, auto loans, and even HELOCs should see a decrease in interest rates due to Fed actions. This will make the cost of borrowing less expensive, lower monthly payments, and decrease interest over the life of auto loans, etc. Credit card users may only see a few cents difference in their monthly payments, though, depending on the amount owed.
Savers will earn less
The unfortunate impact of lower interest rates is that the incentive to save money decreases, as savers earn less on their savings. Some may turn to equities markets to try to recoup some of the lost earnings, but the hardest hit will be older Americans who may rely on interest from savings, CDs, and bond investments to augment their Social Security income.
We can’t know at this point if additional rate cuts will come to fruition in the future, or if the Fed will once again head toward its previously plan of increasing rates. This will largely depend on how the economy responds to this latest action, continued pressures from tariffs and other political maneuverings. However, don’t let the dis-incentive to save deter you from saving for retirement and maintaining an emergency fund. Even though interest-bearing savings accounts may take a hit from lower interest rates, it’s important for your own financial health to have enough savings to weather unexpected repairs to your home or unanticipated unemployment.
If you are shopping for a new home, give us call! Whether you are looking to buy or sell a home in Northern Virginia, we are always here to help with all your real estate needs! If you are unsure of your home’s value or if you are thinking about buying or selling, contact Jason at 703-298-7037 or Jason@JasonAndBonnie.com.