Investing

The Federal Reserve has pledged to support markets — here's what that means for you

Twenty/20

As the stock market has tumbled lower in recent weeks, the Federal Reserve has stepped up in various ways to help stabilize markets and the U.S. economy.

Central bankers first took action on March 3, when they surprised Wall Street by cutting interest rates by half a percentage point. They did so again less than two weeks later, slashing a benchmark rate to 0%-0.25%. 

Policymakers have said the Fed will help businesses get up to $1 trillion in funding in the short-term borrowing markets, and it will begin a program to support lending to small and midsize businesses.

On Monday, the central bank expanded one of its key ways to pump money into the economy, a program known as quantitative easing, in which it buys government bonds and other financial assets. Unlike when the central bank has deployed this program in the past, however, it's now doing so without a dollar limit.

Central bankers took some of these same actions during the 2007-2009 financial crisis, though they've also tried new tools in recent weeks, including a pledge to buy corporate bonds for the first time. As a result, the Fed has indicated it will surpass its response to the Great Recession, in terms of both timing and intensity, to combat the potential economic fallout caused by the coronavirus outbreak.

Many experts are grateful for the interventions. "What we know now is the Federal Reserve is there for us," says Skip Johnson, co-founder of Great Waters Financial.

The Fed's latest promise on Monday to use what amounts to an unlimited checkbook to buy assets to make it easier to lend money will help ensure that markets continue to function normally, he adds. "It's meant to give us confidence in the markets so there's just one less thing to worry about right now."

What we know now is the Federal Reserve is there for us.
Skip Johnson
co-founder of Great Waters Financial

How the Fed's moves affect you

When policymakers lower the Fed's benchmark interest rate, you're most likely to see a direct effect on your financial life. It can take some time, but you'll notice lower interest rates filter down to your savings accounts and lines of credit. 

As a result, that may make now a more attractive time to take out a loan or refinance an existing one, like a mortgage, though you'll also earn less interest on your savings account. And that's part of the Fed's goal: By making it cheaper to borrow money, consumers and businesses might take out loans for big-ticket purchases and help to stimulate economic activity.

The details of all "the inner workings" of the various tools at the Fed's disposal "shouldn't be on the mind of everyday investors," says Tom Stringfellow, the president and chief investment officer of Frost Investment Advisors. What's important is to understand that the Fed is trying to boost the broader economy.

The Fed's actions help to ensure that banks don't fail and that you have easy, continuous access to your money, he says: "They're trying to make sure we don't have a circa-1929 run on the banks."

And even though much of what central bankers have promised to do focuses on helping the biggest companies, that still can affect you. "They want to make sure the big companies don't go under so there's not a ripple effect," explains Mark Doman, chief executive officer and co-founder of The Doman Group. "We're dealing with a larger variable set than we've had to deal with in the past."

How the Fed's moves affect your portfolio

While it might not be obvious with the S&P 500 down nearly 30% from its February high, the Fed has likely prevented the stock market, and other markets, from falling even more.

"The Fed is trying to stabilize what was becoming a very frantic marketplace," Stringfellow says.

They want to make sure the big companies don't go under so there's not a ripple effect.
Mark Doman
chief executive officer and co-founder of The Doman Group

Chance are, you're invested in bonds in addition to stocks. And the Fed's promise to buy Treasury bonds, among other types of assets, can help you directly.

Policymakers are ensuring the markets continue to function properly and helping to buffer potential losses. "If they were not to step in, money market and bond funds could be losing value if they're unable to be traded, potentially leading to some sort of panic," Johnson says.

The Fed promising to keep buying bonds will create higher demand for these types of assets. And when a lot of people are eager to buy bonds, that will push the price higher and the yields lower. That means if you invest in bonds now, you'll pay more for a lower return.

And even though the Fed is taking unprecedented action, and it might not feel like much that's specific to you, it matters for your investments in the long run. 

"We will get through this and if you have a long-term horizon, markets are likely to be higher in the future than they are today," Johnson says.

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