Rate cuts during COVID-19: How do they impact you?

Insights and tips on the impact of the federal rate cuts amid the COVID-19 pandemic and what this means for credit card rates, mortgages and more.

Tags: Credit, Home, Home buying, Home equity, Interest rate, COVID-19
Published: April 28, 2021

As the COVID-19 pandemic continues, our nation has joined together to flatten the curve and minimize the economic impact. Amid social distancing, shelter-in-place orders and congressional stimulus packages, the Federal Reserve has also acted – dropping the federal funds rate to levels not seen since the financial crisis of 2008. If you’re wondering what this means for you, U.S. Bank financial industry and regulatory affairs expert Robert Schell offers helpful insights. Read his thoughts on why rates were lowered and what that means for your everyday finances. 


Why did the Federal Reserve lower rates?

Maintaining a stable economy is one of the Federal Reserve’s highest priorities. By raising and lowering the federal funds rate, the Fed can help curb high levels of inflation or boost the economy during a recession. Most recently, the federal funds rate was cut to 0%-0.25% to encourage spending and stimulate our economy.


Lower interest rates make spending easier

When the federal funds rate drops, the cost of borrowing (i.e., interest rates) tends to follow. It’s this relationship between the federal funds rate and interest rates that helps the Fed boost economic activity. Low interest rates make it easier for people to borrow and spend money. Therefore, people are more likely to take out loans and make purchases. While it may seem strange to encourage spending during today’s uncertain times, the Fed understands that the more you spend, the more that money feeds back into the economy.


Credit cards, home equity lines and variable rate products

You can expect low interest rates on credit cards, home equity lines of credit and other variable rate products because they are directly connected to the federal funds rate. Banks determine these variable interest rates using an index called the prime lending rate, which is generally set at 3% above the federal funds rate. While rates remain low, consider taking advantage of the low cost of borrowing to fund a large purchase, pay off debt or make home improvements.


Mortgages and refinancing

Today’s low rates could mean significant savings on interest over time. Whether you’re looking to purchase a new home or refinance your current mortgage, you’ll see lower interest rates across the board due to the recent federal rate cuts. But don’t assume the lowest rate is always the best deal. Here’s what you need to know about mortgages and the federal funds rate.

Adjustable-rate mortgages

Like credit cards and home equity lines of credit, the cost of an adjustable-rate mortgages fluctuates with the prime lending rate. Although ARM mortgages are very affordable right now, your rate will likely increase – perhaps significantly – as the COVID-19 pandemic passes and our economy begins to stabilize. Talk with a mortgage loan officer about the right option for you.

Fixed-rate mortgages

Interest rates for traditional fixed-rate mortgages are based on the Treasury rate – a financial index used to determine the risk associated with long-term loans. Because our economy is so interconnected, the federal rate cuts have indirectly impacted the Treasury rate and resulted in lower fixed interest rates. By refinancing your mortgage now, you could lock in a lower rate and save on interest for years to come.


Savings and CDs

While now is a great time to borrow money, it’s not as fruitful to put money in a savings account. As interest rates lower, so does the Annual Percentage Yield (APY). You won’t lose money during this time, but you will earn less on the money you hold in savings accounts. Be patient and don’t let this keep you from saving. Eventually as the economy stabilizes, the APY on savings accounts and CDs will increase again.


We’ll get through it

The most important thing to remember in this economic environment is not to panic. The low federal funds rate encourages spending and boosts critical economic activity. Plus, lower rates make it a bit easier to borrow money and keep up with your bills during the COVID-19 pandemic.


If you have specific questions about your financial situation, scheduling an appointment with a banker is a good place to start.


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