The Federal Reserve announced that it’s keeping interest rates steady following its March 16-17 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 weathered the effects of the coronavirus.
The decision to leave rates alone was widely expected, and it comes as the U.S. economy shows signs of bouncing back thanks to vaccinations and nearly $3 trillion in fiscal stimulus so far this year. Federal Reserve Chairman Jerome Powell has said that highly accommodative monetary policy will continue for the foreseeable future.
Meanwhile, U.S. Treasury yields have soared so far this year, as expectations for an economic rebound mount and Congress goes big on fiscal stimulus with the Fed also continuing easy money policies for an extended period of time.
“The stimulus is expected to unleash a torrent of economic activity,” says Greg McBride, CFA, Bankrate chief financial analyst. “The Fed’s economic outlook got a big upgrade, with the median forecast of GDP growth this year expected at 6.5 percent, up from 4.2 percent in December. Forecasts also call for lower unemployment and higher inflation than had been projected just three months ago.”
The central bank has taken other steps to keep interest rates near its target range, too. The Fed has injected hundreds of billions of dollars into the financial system via repurchase agreements (repo), in which banks exchange securities for cash for a preset time period. The Fed has also been buying Treasury bills and mortgage-backed securities at a higher rate, which it will hold on its balance sheet. And it previously announced an unprecedented, unlimited bond-buying program.
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 also become a huge buyer of mortgage-backed securities, helping to steady that market and keep mortgage rates low.
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.
“Even with the recent rise in rates, mortgage rates are still lower than anything seen prior to last summer,” says McBride. “Homeowners can take advantage by refinancing a mortgage, reducing the monthly payment, and saving tens of thousands of dollars over the life of the loan.”
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 is 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.
“The stock market loves low rates and elevated valuations are predicated on it,” says McBride.
With the Fed keeping rates low and with 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 roared back fiercely, and the Standard & Poor’s 500 Index now sits near all-time highs – a move that continues to surprise many investors.
Meanwhile, “four members of the Fed project at least one interest rate hike in 2022,” says McBride. “While contingent on the economy meeting expectations, investors aren’t going to like it.”
3. 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.
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 largely already 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.
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. 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 to stay lower for longer 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.
6. 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 rising above $28 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.
According to the Congressional Budget Office, the federal government racked up a record deficit of $3.1 trillion in the latest fiscal year, which ended Sept. 30. But low rates mean the borrowing cost of spending more remains manageable, for now. That could be valuable since the government will likely extend emergency stimulus programs as part of its COVID-19 relief plans.
All the liquidity, however, has started to hurt the value of the dollar, with rates on key currencies slipping over the last year. At some point lower exchange rates may limit how much foreigners want to hold U.S. dollar-denominated debt, at least at such low interest rates.
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.
With the Fed’s patient rate approach and willingness to let the economy run hot, expectations of a strong recovery are now ratcheting up some talk of future inflation. 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.