The Federal Reserve announced that it’s keeping interest rates steady following its Sept. 21-22 meeting, leaving the federal funds rate at a range of 0 to 0.25 percent. This follows the Fed’s decision to hold rates near zero until the economy has fully weathered the effects of the coronavirus.
The move was widely expected, and it comes as the U.S. economy continues to bounce back, thanks to vaccinations and trillions in fiscal stimulus. Federal Reserve Chairman Jerome Powell has said that highly accommodative monetary policy will continue for the foreseeable future. But Fed watchers are questioning how much longer the current policy of buying bonds will last and when the Fed will begin tapering its purchases of them.
“The Fed is inching closer to tapering, the process of slowly – very slowly – dialing back their bond purchases,” says Greg McBride, CFA, Bankrate chief financial analyst. “The stock market has been a direct beneficiary of the Fed’s stimulative actions and the prospect of reducing that is sure to spark heightened market volatility.”
Some Fed watchers are concerned that, if the central bank keeps its foot on the gas too long through low rates and bond purchases, it could lead to inflation.
“The bigger risk is if the Fed delays tapering into 2022,” says McBride. “The waves of liquidity could further fuel inflationary pressures and inflate dangerous asset bubbles.”
For now, however, the bond market doesn’t seem to be pricing in a huge incremental rise in inflation. After soaring in the first few months of 2021, U.S. 10-year Treasury yields have retraced about half their gain but they’re still above their lowest levels and have firmed up in recent weeks.
As the Fed continues to sit tight on rates, here are the winners and losers from the latest decision.
While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. But in addition to maintaining low rates, the Fed has become a huge buyer of mortgage-backed securities, helping to steady that market and keep mortgage rates low, though it may be backing off those purchases in the near term.
“The conventional wisdom was that tapering bond purchases would push mortgage rates higher – and it might – but the bigger threat could be inflation,” says McBride. “In that context, tapering the bond purchases sooner could help keep future inflation at bay and put a lid on mortgage rates.”
This low-rate environment is great if you’re looking to get a mortgage or you’re able to refinance an existing mortgage. Those with adjustable-rate mortgages can also benefit from low rates. Demand for mortgages has surged over the past year as low rates have made them more attractive.
Those who are unable to take advantage of low rates — perhaps because they’re underwater on their house or maybe they’ve locked in a fixed-rate mortgage and today’s rates aren’t quite low enough that it makes sense to refinance — miss out here. In addition, millions of unemployed Americans are unable to gain a direct mortgage benefit from low rates, because they’re unable to show an income.
2. Stock investors
A huge boon for the stock market has been the Fed’s policy of open-ended buying of bonds and willingness to keep rates at near zero for as long as it takes for the economy to recover. Low rates are beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed income investments such as CDs.
As long as the Fed keeps rates low and offers unprecedented support for the market, investors are likely to keep a floor under stocks. After the initial drop in stocks in the weeks following the emergence of the coronavirus in the U.S., stocks have rallied hard over the past 18 months, and the Standard & Poor’s 500 Index now sits near all-time highs.
But some elements of the Fed’s support, such as reduced bond purchases, may change in the near future, and the markets could soon begin pricing it in.
“Despite short-term volatility, the long-term view of sustained economic growth, declining unemployment and improved household balance sheets is intact – and that is ultimately good for corporate profits and stock prices,” says McBride. “Investors should view any pullback through that lens and treat it as a buying opportunity.”
3. The U.S. federal government
Debtors welcome low interest rates, because they’ll owe lower payments, and there’s no bigger borrower than the U.S federal government. With the national debt approaching $29 trillion, the prospect of low rates remains a spur to refinance outstanding debt at low rates, offering the opportunity to save potentially billions of dollars as the government rolls over its debt.
All the liquidity, however, has hurt the value of the dollar, with rates on key currencies slipping since the pandemic began, though they’ve rebounded more recently.
Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.
4. Home equity
The cost of a home equity line of credit (HELOC) remains low, since HELOCs adjust relatively quickly to changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers.
Since rates on HELOCs remain low, those with outstanding balances on their HELOC will continue to have low interest expenses. A low rate is also beneficial for those looking to take out a HELOC, and it can be a good time to comparison-shop for the best rate.
If you can’t take advantage of the low rates on your HELOC – for example, some HELOCs let you lock in a fixed rate on a portion of your borrowing – then they don’t benefit you, and you might otherwise be paying less. (Here are the pros and cons of a HELOC.)
5. Savings accounts and CDs
Low interest rates mean that banks will offer low returns on their savings and money market accounts. CD rates saw a substantial decline after the Fed lowered rates in early 2020, and they’ve never really recovered.
CD owners who locked in rates recently will retain those rates for the term of the CD. And those shopping for CDs may be able to still find a relatively attractive deal if they search across the nation’s best rates.
Savings accounts have felt the brunt of lower rates, as most banks quickly ratcheted rates lower following the Fed’s emergency cuts in March of last year. Still, there are a handful of banks that are offering substantially better rates than their peers.
Savers looking to maximize their earnings from interest should turn to these online banks, where rates are typically much better than those offered by traditional banks.
6. Credit cards
Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards is likely to remain flat, too.
If you have an outstanding balance on your cards, then a low rate is welcome news. However, it’s important to keep the low rates in perspective, because credit card rates are still among the costliest forms of financing for consumers.
Still, persistently low rates could be a welcome opportunity to find a new credit card with a lower rate.
Low rates on credit cards are largely a non-issue if you’re not running a balance.
With blocked supply chains, eager consumers and the Fed’s patient approach to rates (along with its willingness to let the economy run hot), inflation has been ratcheting higher. So while rates on financial products remain low by historical standards, it may make sense to make your money moves (such as locking in a low-cost mortgage) while you still can.