Earlier this week, The Federal Reserve Open Market Committee, aka The Fed, made a surprise move by lowering the Federal Funds Rate (FFR) by 50 basis points, or 0.50%, to 1.25%. They made this move in response to how the coronavirus is disrupting the economy.
The FFR is the rate that banks charge each other for overnight loans. Although this is the only interest rate the Fed actually ever changes, it influences other short-term rates such as savings accounts, loans, credit card rates, and adjustable-rate mortgages. Modifying this rate is one of the Fed’s tools that they use to maintain a healthy economy. They lower it if they feel the economy is slowing and raise it if the economy is heating up too quickly.
The Fed typically makes changes to the FFR following one of their scheduled meetings. They also seldom change it more than 0.25%. This time, they made the change without a scheduled meeting and it was twice the magnitude that they normally make. The Fed felt that the timing and magnitude of the move was needed to help shore up financial markets as news of the virus broke out.
How effective this action will be remains to be seen. Regardless, this unexpected rate change will lower the rates on many of the financial accounts that we interact with every day. Here is a list of some of the more common ones:
- Adjustable rate mortgages
- Car loans
- Home equity/HELOC loans
- Credit cards
- Savings and money market accounts
- CD rates
In general, a lower FFR helps borrowers and punishes savers.
The big picture goal for the Fed is that this rate change will lower borrowing costs for businesses, which will help their cash flow if their sales are hurt by the coronavirus. It will be interesting to see how this plays out.
Shoot me an email if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
