If you’re wondering whether the Federal Reserve will change interest rates in the near future, the good news is that Fed rate hikes don’t appear to be coming anytime soon.
The Federal Reserve is mandated by Congress to promote stable prices for consumers. To meet that goal, the Fed cut interest rates at its October meeting for the third consecutive time in 2019, due to weakening business investments and exports. The business slowdown is due to President Donald Trump’s ongoing trade disputes between the United States and China. In December, following this series of cuts, the Fed announced that interest rates would remain unchanged.
GOBankingRates took a look at interest rate predictions for 2020 and explored how federal interest rate changes impact your wallet. This guide to Fed rate cuts and hikes will cover the following topics:
- What To Expect From the Fed in 2020
- Fed Rate Cuts
- How Does a Rate Cut Affect You?
- Fed Rate Hikes
- How Does a Rate Hike Affect You?
- Historically Significant Shifts in the Interest Rate
- Consider Your Long-Term Financial Plans
The Federal Open Market Committee, which sets interest rates, lowered the rates at its July, September and October 2019 meetings. At each meeting, the Fed dropped its benchmark interest rate by 0.25%. The most recent reduction, which was announced on Oct. 30, brought the target range for the rate down to 1.5%-1.75%.
The FOMC’s October press release offered some context around this decision. According to the statement, the committee brought down the target range for the federal funds rate “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”
The Fed met again on Dec. 11, this time deciding to leaves the rates unchanged. According to economic projections released by the Fed, rate changes are not anticipated to be likely for 2020. The committee will monitor inflation and other economic factors to help determine the future direction of the rates.
Sometimes the Fed decides to lower interest rates, as it did in 2019.
Why Does the Fed Cut Rates?
The Fed cuts interest rates to stimulate economic growth. This happens in two ways. First, lower interest rates mean it costs less for businesses and consumers to borrow money. Companies are more likely to borrow money to expand, which leads to more jobs as new businesses are constructed and new employees are hired to staff new locations. Consumers are more likely to borrow money to purchase cars or use credit cards for purchases.
The second way lower interest rates boost spending is by making savings vehicles less appealing. The interest rates on savings accounts also drop due to federal rate cuts, which encourages savers to move their money to vehicles that offer the potential for higher returns, like stocks.
When Was the Last Fed Rate Cut?
The last Fed rate cut took place in October 2019. The first 0.25% rate reduction of 2019, which took place in July, was the first reduction since the 2008 financial crisis. Rates were low from 2008 to 2015, and then the Fed made nine rate hikes from 2015 to 2018.
Rate cuts impact almost every aspect of consumer spending and saving. Here’s a closer look at how rate cuts could impact your savings and spending plans.
The Prime Rate
Financial institutions use the prime rate as a benchmark to determine interest rates of financial products. The prime rate is commonly used to determine credit card rates and home equity line of credit rates. The prime rate forecast typically follows the federal funds rate forecast, so when the Fed rate goes down, the prime rate goes down, too.
Credit Card Rates
The average credit card interest rate is 14.87% as of November 2019, which is 0.23% lower than it was in the third quarter of 2019, according to the Fed. Most credit cards come with variable annual percentage rates, which are commonly based on the prime rate. If the prime rate becomes lower and you have a credit card with a variable APR based on this rate, your APR is likely to go down as well.
Savings accounts tend to offer lower interest rates when the Fed cuts interest rates. This means that any money you have parked in a savings account likely isn’t going to earn as much money. Federal interest rate cuts mean it’s a good time to look for high-yield savings accounts or to lock in a higher interest rate on a long-term fixed-rate CD.
Student Loan Rates
Private student loans can come with either variable or fixed rates. If you have a variable rate on your private student loan, you might see a rate reduction as a result of a federal rate reduction. If you have private student loans, you may want to learn about your refinancing options.
Car loans tend to be long-term, often lasting three to five years. Auto loans are sometimes tied to the prime rate, and federal rate reductions could lead to a lower prime rate, which might result in slightly lower auto loan rates.
There isn’t a direct relationship between the Fed’s rate and mortgage rates. That said, the same factors that lead the Fed to lower interest rates can also affect mortgage rates. For example, if the economy is slowing down, lenders may lower mortgage rates to encourage more people to borrow.
Home sales typically follow mortgage rates. If economic factors are leading to lower mortgage rates, consumers are more likely to buy a home, which can result in an uptick in home sales.
A federal rate reduction is ideally meant to result in increased consumer spending. This is due to lower rates for banks, which will often reflect that lower rate by bringing down annual percentage yields for savings accounts and interest rates on credit cards. After all, if your money is sitting in a savings account and earning a fraction of a percent, it’s significantly more tempting to spend it on something. Combine that with lower interest rates on credit cards, and it could potentially lead to an uptick in consumer spending.
Federal rate cuts are unlikely to impact the national debt. This is due to the high level of borrowing, with about $1 trillion being added each year. Lower interest rates reduce how much interest the federal government pays on its debt, but given that the national debt hit $22 trillion in 2019, it’s not going to make much of a difference.
Sometimes the Fed raises interest rates, as it did from 2015-2018.
Why Does the Fed Raise Rates?
The Fed raises interest rates when it views the economy as growing too quickly. Although it’s tempting to see economic growth as inherently good, there is a danger of that growth spinning out of control, resulting in an unreasonable amount of inflation. When the economy grows too fast, it can overheat and create the sort of bubbles and subsequent crashes that can undermine long-term growth — like the 2008 financial crisis. When times are good, the FOMC will typically start inching up interest rates to try and keep growth at a steady, sustainable pace. It doesn’t always work as it’s never 100% certain how much economic growth is too much until it’s too late, but that doesn’t stop the FOMC from trying to keep the economy stable.
When Was the Last Fed Rate Hike?
The most recent rate increase was in December 2018. The Fed raised interest rates four times in 2018 and three times in 2017.
A federal rate hike is designed to slow the economy down. This means that rate hikes will negatively impact your spending and borrowing but benefit your saving. In general, you’ll see higher interest rates across the board. A rate hike is a good time to evaluate your savings strategy and potentially curb your spending to take advantage of potentially higher rates on savings accounts.
The Prime Rate
The federal funds rate is the basis for the prime rate. When the federal rate increased by 0.25% in December 2018, for example, the prime rate also increased.
Credit Card Rates
Credit cards typically come with a variable APR based on the prime rate, so you might see higher rates on the cards in your wallet. You will also see higher rates on new credit card offers, so if rates are creeping up and you need a new credit card, you’ll want to compare APRs or look for cards with low promotional rates before applying.
Savings accounts see a boost when the Fed raises interest rates. It’s a good time to rate shop and take advantage of high-yield savings accounts and certificates of deposit, especially if you are retired or nearing retirement.
Student Loan Rates
If you have a variable-rate student loan, you might see your rate increase along with federal rate increases. If your private loan rates are trending upward, it might be a good time to look at your refinancing options.
As with other ways of borrowing money, the costs of certain auto loans could go up along with the federal funds rate. If you’re shopping for an auto loan and considering a bank as your lender, check its prime rates to be sure it’s made a change to reflect a new Fed rate hike. If they have increased, expect a slight increase in rates on newly originated car loans as well.
The federal rate doesn’t directly impact mortgage rates. The federal rate is the rate financial institutions use to lend each other money on a short-term basis. When the Fed raises rates, it becomes more expensive for banks to borrow money, and some of that cost is passed on to consumers. Mortgages are long-term loans, though, so the impact generally isn’t felt as much when the Fed raises rates.
The bottom line is that you might see an uptick in mortgage rates, but that’s as much about economic conditions as it is about the federal interest rate. To avoid the possibility of unfavorable rate adjustments, homeowners with an adjustable-rate mortgage can consider their refinancing options and look into lower fixed rates.
Homes sales may also slow due to rising interest rates. Savings accounts are earning more money, and spending isn’t as appealing due to the higher interest rates — which could be reflected in mortgage loans for potential homebuyers. Home prices may be lower to compensate for higher interest rates. Higher rates could also pave the way for an increase in demand for rental properties.
One reason the Fed increases interest rates is to slow consumer spending. Banks tend to reflect the federal increase in their own rates, meaning that your savings account could have a higher APY and your credit card interest rate could also rise. In the face of rising rates, consumers start to rethink making big purchases and park their money to take advantage of the higher interest rates.
The national debt has been trending upward. Given that the national debt has been increasing by roughly $1 trillion annually, increasing interest rates will grow the national debt exponentially. Even more of the federal budget needs to go toward paying interest on the national debt in the face of higher interest rates.
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Historically high federal funds rates were seen in the early 1980s. As part of an effort to combat inflation, the rate drew near 20%. Inflation had been growing steadily and reached double-digit levels in the 1970s. The high interest rates led to a recession, but it was a necessary move to stop the spiraling inflation.
The lowest federal rates were seen in the wake of the 2008 recession. The rates reached lows of less than 0.25%. They stayed that way until December 2015 to ensure an economic recovery.
With rates changes not appearing to be likely for 2020, now might be a good time to consider your savings strategies and whether they fit into your long-term financial plans. For example, depending on your unique financial situation, one possibility you might consider is to look at savings options that are available overseas. After all, the Fed only sets rates in the United States, and your savings might see a boost from opening an account in a country with higher rates.
While it’s unlikely to happen in the U.S. in the near future, those who tend to prepare for all possible scenarios might want to consider what to do in the event that negative interest rates end up on the table one day. Warren Buffett has offered several tips on how to react when facing dwindling interest rates.
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Joel Anderson contributed to the reporting for this article.