How The Fed’s Decisions Impact You
How The Fed’s Decisions Impact You
By: Stacey Nickens
When COVID-19 began spreading widely in March, the Fed began lowering interest rates and injecting liquidity into the market. They purchased $3 trillion in bonds and securities and still have the authority to support up to $2.6 trillion in new lending. The Fed can make business loans through its Main Street Lending Facility and governmental loans through its Municipal Liquidity Facility. Additionally, the Fed is backing loans offered through the Paycheck Protection Program, a loan-forgiveness program for businesses.
At their June meeting, the Fed discussed keeping interest rates around 0% until 2023. Members did discuss a few metrics that must be met before interest rates would be raised, such as inflation rates or unemployment benefits; however, the Fed delayed selecting specific benchmarks. Overall, it’s clear that interest rates will remain depressed for a significant period of time. So how does this impact you and your finances?
Good News for Borrowers
Now is a great time to buy a car or a house, as well as refinance your home. The 30-year fixed mortgage rate will likely stay under 4% for some time. (However, keep in mind that housing prices are likely to rise when interest rates are lower.) Other consumer loan rates, including for auto or home equity loans, will likely also remain low during this period of volatility.
Bad News for Savers and Income InvestorsÂ
Depressed interest rates means bank deposits, certificates of deposit, and short-term U.S. governmental securities will pay very little. It’s also unlikely that you will see significant returns from long-term government and corporate bonds. (Though, it is important to note that the Fed has been buying corporate bonds to inject liquidity into the market, driving up those bonds’ values.)
Additionally, low yields from the bond market turn into higher annuities and life insurance premiums. Insurance companies make a significant amount of money through fixed-income investments, and when these companies’ earnings are down, they push that cost off onto the consumer.
A Move Towards Stocks
With the bond market struggling, most investors will have to focus on stocks in order to make money in their portfolio. The stock market leaves investors more exposed to volatility. At the same time, investors will have access to more high-growth opportunities in the stock market. It will be important to keep an eye on companies that pay consistent and strong dividends as well as companies seeing revenue growth due to new opportunities in this changing economy.
Need help?
If you’re wondering the best moves for you and your family during this challenging time, reach out to our experienced team for assistance. ELM3 is always available to help our clients navigate challenging situations and meet their unique familial needs.
