If you’re in debt, the Fed is giving you some breathing room—at least for the rest of 2019.
The Federal Reserve announced earlier this week that it will not increase interest rates for the remainder of the year, reversing course after suggesting in December that it might hike rates twice in 2019. Instead, its benchmark rate will remain between 2.25 percent and 2.5 percent until at least 2020.
Here’s what that means for you:
The Federal Reserve, or the “Fed” as it’s commonly called, is the U.S. central bank. Its aim is to keep our economy healthy, by keeping inflation in check and unemployment low. It also determines the Federal Funds Rate. That’s a benchmark rate that influences rates that banks charge consumers on products like credit cards, auto loans, or mortgages.
By lowering or raising interest rates, the Fed can effectively make it cheaper or more expensive to borrow money. The idea: When money is cheaper to borrow (i.e., a borrower would pay less interest), businesses and individuals are more likely to take out a loan to make purchases or investments. Those purchases and investments, in theory, can give the economy a jolt.
For example, between 2009 and 2015, the Fed kept interest rates near 0 in an effort to spur economic growth. Since then, interest rates have been raised slowly to their current levels.
Although the economy is in relatively good shape, the Fed appears to be holding at current rates in response to concerns about slowing growth.
“The labor market remains strong but…growth of economic activity has slowed from its solid rate in the fourth quarter,” Fed officials said in a policy statement released following their most recent meeting.
There have also been calls from both Wall Street and the White House to slow or stop the rate increases, which may have influenced the decision. During December, the stock market saw a steep sell-off after Fed officials signaled that they would continue raising rates in 2019. Also, President Donald Trump has repeatedly suggested that the Fed should back off from rate hikes, and has said that he’s “very unhappy” with Fed chairman Jerome Powell.
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The Fed has decided that borrowing costs are not going to increase for the rest of the year. So how, exactly, does the Fed’s decision affect you?
“The three main takeaways are that the cost of borrowing likely won’t increase, the rate that you can achieve on savings also likely won’t increase, and typically, not increasing rates is viewed as a positive for the market,” says Doug Boneparth, a certified financial planner and president of Bone Fide Wealth in New York City.
Some smart moves to consider:
- Secure the best rates. While the Fed has its finger on the pause button, it’s a good time to make sure you aren’t paying more than you need to on debt. Shop around for a credit card, or apply for an auto loan or mortgage. In fact, the average rate on a 30-year fixed rate mortgage fell to the lowest level in a year following the Fed’s announcement.
- Open a high-yield savings account. The down side of no rate hike is that the yield on your savings account isn’t likely to rise, either. So re-shop your savings account, too. Some of the most generous offer more than 2 percent.
- Knock down balances. Because interest rates aren’t expected to increase, it might be a good idea to chip away at your debt before or in case rates rise again. “That’s a great way to protect yourself from additional increases and interest rates,” Greg McBride, chief financial analyst for Bankrate.com, told Grow earlier this year. “Every dollar you throw against that balance in that period goes toward the principal.”
Above all, sticking to healthy financial habits is likely the best thing you can do to continue working toward your goals.
“What [the Fed does] is out of your control,” says Boneparth. “But things like your savings rate and being disciplined in spending is squarely in your control.”