Investing

How to take advantage of the Fed's surprise interest rate cut, the biggest since 2008

Twenty/20

Less than two weeks after announcing a surprise rate cut, the Federal Reserve announced it is slashing rates to 0%-0.25% in order to buttress the economy against the impact of the spreading coronavirus. The stock markets have entered a bear market as a result of the virus, and the cut to zero marks the first time since the financial crisis that rates have been so low.

Most experts did expect the Fed to cut rates again. By making it cheaper to borrow money, policymakers hope people and businesses will take out loans for purchases and investments as part of the effort to keep the economy going.

Regardless of whether lower rates may be having the intended calming effect on Wall Street, consumers may be able to capitalize. "I see people who are financially savvy taking advantage of lower rates," says Arizona-based financial advisor Amy Shepard. 

Smart money moves to make when interest rates go down

It may take some time before you notice lower interest rates filter down to your savings accounts or lines of credit. Regardless, here are a few smart money moves you can make once the rate cut kicks in.

Check in on your savings and investments. Lower rates typically mean that any savings you have in the bank will earn less in interest, so it may make sense to shop around for higher rates on savings accounts. Or you could invest some money in a CD, which makes funds unavailable for a predetermined amount of time, like two years, and in exchange generally offers a higher interest rate.

Also, you may want to consider rebalancing your portfolio. Sam Stovall, chief investment strategist at CFRA Research in New York, told Grow last year that the sectors that tend to benefit from lower interest rates will likely surge. "Utilities, real estate, consumer staples have done well" in low-rate environments, he said.

Look at refinancing options. If you've been holding off on refinancing your mortgage or other loans, now may be the time to act. 

"Lower rates provide an opportunity for lower-cost borrowing, including for mortgages, which support refinancing and prospective homebuyers," says Mark Hamrick, senior economic analyst at Bankrate. Experts suggest borrowers look at their available refinancing options: You could lower your monthly payments and cut back on the amount you'll spend on interest.

Consider making a big purchase. Lower rates may bring down the cost of a significant purchase, like a home, a pricey home appliance, or a car. With the average car payment near an all-time high, locking in financing with a lower rate is likely to save you money. The same goes for mortgages.

Why the Fed cuts interest rates

Generally, the Fed lowers interest rates to give a boost to the markets and to consumer spending. Given that the market has been at or near record-highs in recent months, though, this latest cut underscores just how seriously the Fed is taking the coronavirus threat.

Prior to this week, the Fed had slashed rates by at least 50 basis points 19 times in the past 30 years. And policymakers had made such a drastic cut to interest rates during a year when there wasn't a recession only three times before.

"The economic outlook has downshifted," says Scott Colbert, chief economist at Missouri-based Commerce Trust Company. "We don't know what the impact of the virus is going to be, but there's no doubt that things have changed."

Colbert says that he expects further action by the Fed and policymakers going forward, including the possibility of more rate cuts. "There's likely" more coming, he says.

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