The Federal Reserve may be on hold, but that doesn’t mean your financial goals should be.
Strong economic growth led the U.S. central bank to increase borrowing costs four times in 2018. But this year, officials have chosen to be patient before deeming another rate move necessary. The policy pivot started in response to slowing global growth in January, but more recently, it’s been about inflation remaining stubbornly below officials’ target.
The Federal Open Market Committee (FOMC) continued following this stance on Wednesday, voting unanimously to hold borrowing costs steady for the third time this year.
When the Fed decides not to raise or lower interest rates, it might make your next steps less clear. It’s not as if debt is about to get more expensive, as it would after a rate hike. And it also doesn’t appear as if the economy is on the brink of a downturn, as a rate cut might suggest.
But it’s not the time to get complacent, says Mark Hamrick, Bankrate’s senior economic analyst. “For the rest of us, we can seize upon this quiet period of Fed action to focus on our financial goals,” he says.
When it comes to your finances, here are four money moves to consider to best take advantage of the Fed’s lull period.
1. Pay down debt
If you’re carrying credit card debt, time is on your side.
That’s because you’re hit hard if the Fed decides to hike rates. Most credit cards charge consumers a rate that’s tied to the prime rate, which in turn, is tied to the federal funds rate, the Fed’s key policy instrument. As a result, each time the Fed decides to increase borrowing costs, the interest rate payment on your credit card goes up along with it.
After four hikes in 2018 and nine total since the expansion began, you now have some time to catch your breath — but don’t sit still for too long.
“With the Fed on hold, consumers are no longer contending with the headwind of rising interest rates,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “Debt repayment efforts are more productive.”
That means you should maintain a focus on paying down your debt, before rates get any higher — something the majority of economists expect, according to a Bankrate survey from March.
Fed Chairman Jerome Powell said interest rates are in an “appropriate” place at the Fed’s most recent press conference, adding that the committee doesn’t see any reason to move “in either direction.”
It remains to be seen, however, how long that patience will last, says Hamrick.
“All we know for certain right now is that the Fed thinks the current policy with rates stands for now, meaning no further rate hikes in the near-term,” Hamrick adds. “Many investors are betting the next move for the Fed will be to cut rates, but I put that in the category of speculation.”
If you do end up needing additional borrowing, it might be a good time to refinance a mortgage, he says. Rates have declined in recent months.
Use Bankrate’s tools to compare refinancing rates in your area now.
2. Open a high-yield savings account
Savers might not be cheering the Fed’s decision to pause interest rate adjustments. After all, they’re the ones who typically benefit, as banks increase their APY offerings as a result of each Fed rate hike.
This time, however, that’s not the case.
For the first time in a decade, online savings accounts with the highest yields are ahead of inflation. And with inflation cooling in March, that looks like it’s going to continue to be the case.
Right now, the Fed’s rate pause is the best time for savers. A hike could potentially trim inflation into dangerous territory, while a cut could stimulate it to pick back up, diminishing your returns.
More than 30 banks currently offer annual percentage yields of above 2 percent. Shop around for the accounts with the best rates and tools for you, Hamrick says.
3. Build up emergency savings
Whether it’s through your newly-opened high-yield savings account or another method, it’s time to start building up your emergency savings.
While the influx of positive economic data reveals that a recession isn’t on the horizon, it’s still on a lot of economists’ minds. Seventy-seven percent of business economists surveyed by the National Association for Business Economics (NABE) expect that the U.S. economy will enter a recession by the end of 2021.
“Nothing helps you sleep better at night than knowing you have money tucked away for unplanned expenses,” McBride says.
If the Fed were to cut rates, it could signal something potentially frightening about the economy: that it needs to be stimulated more. And if the Fed hikes too much, it could potentially cause a recession.
Take advantage of the Fed’s pause by building up some financial cushions.
“While rates haven’t surged as much as some might have liked, there’s never a bad time to focus on socking money away for emergencies and for retirement,” Hamrick says. “Those are solid goals over the long-term as we try to look past the near-term aspects of economic growth, financial markets and interest rates.”
But when it comes to your emergency money, it’s best to find an account that gives you good access to funds, Hamrick says. While certificates of deposit, specifically short-term CDs, look attractive now, it’s not the best route, in this case.
“The nature of emergency savings means that the funds need to be liquid, or quickly-accessed. So one doesn’t want to risk a penalty that would associated with early withdrawal of a certificate of deposit,” Hamrick says. “When looking for a savings account, it definitely pays to shop around.”
4. Stay the course with your retirement savings
As the Fed figures out what patience means for an economy about to reach its longest expansion on record, one thing’s for certain: the markets might be a little choppy.
That was evident even during the Fed’s May press conference, after Powell described the forces exerting downward pressure on inflation as “transient.”
But turbulence is normal, and it’s not worth worrying about your long-term investments, according to McBride.
“For long-term goals like retirement, ignore the hype, the conjecture, all the screaming on cable TV, and just stay the course,” he says. “Have an appropriate investment allocation, and save aggressively in low-cost index mutual funds within a tax-advantaged account.”
Take the Fed’s December hike for example. It sparked a sell-off, ushering in the worst December for stocks since the Great Depression. Those losses, however, have all but been erased, as the market looks to be nearing a record-high.
“Investors focused on long-term retirement savings goals should take solace from the fact that stocks rebounded from their Christmas Eve 2018 lows,” Hamrick says. “Volatility will always be with us, but over the long-term, equities-facing investments including mutual funds and exchange-traded funds (ETFs) provide superior returns that retirees require.”
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