March 2020 | Robert R. Fragnito | Chief Operating Officer | Financial Advisor | Print Version
The US Federal Reserve on Sunday, March 15 cut its Fed Funds Rate to zero (0%-0.25%) and announced a $700 billion-dollar quantitative easing program to counter the potential effects of the coronavirus on the US economy.
This move by the Fed is a very important development as the market continues to grapple with volatility. Such moves may not seem apparently relevant when it comes to our daily lives. The purpose of this article is to offer some insight into what this may mean for you. Here are some answers to a few questions you may be asking yourself.
What is the Fed Funds Rate?
For starters, the Fed Funds Rate is a benchmark rate at which banks borrow and lend excess cash reserves to each other on an overnight basis. The Fed’s Federal Open Market Committee (FOMC) meets eight times a year to set this rate. The FOMC meets to assesses many indicators to see how the economy is progressing and will make adjustment accordingly.
Why is it important?
Fed Funds Rate impacts the money supply and can affect growth, inflation, or employment in the US economy. In addition to these factors, the rate indirectly effects short-term lending rates on home mortgages, credit cards, auto loans, student loans and savings accounts. We must understand however, that loan rates are typically based on the prime lending rate or US Treasury Notes.
Financial markets are attentive to the actions by the Fed because interest rate fluctuations may sway movements in the stock market. Analysts pay close attention to statements from Fed officials to interpret where these rates may be headed.
What could this mean for me?
Everyone’s circumstance is different, but as it relates to this recent cut, there are few areas of your financial picture you should consider. It may be a good time to take inventory of what you’re paying in interest on the debt you owe. You may consider refinancing major debt obligations like your home mortgage, auto loan, or other loans.
For savers, this means you may see a decrease in the rate of interest your earning on your bank savings or interest-bearing checking account. In terms of your portfolio or retirement, actions by the Fed can influence decisions investors make on the direction of financial markets as whole. As you think of these financial considerations, it is important to monitor what the Federal Reserve is doing in the economy.
The fallout from the impact of the coronavirus will become more apparent in the months to come. The Fed in addition to other central banks around the world are attempting to alleviate the impact of this pandemic on the global economy. For this reason, we must be aware of the potential influence and effects it will have on our lives.
The FOMC will meet again on April 28th and 29th to once again gauge the state of the economy and may adjust or maintain the Fed Funds Rate. We at MCF monitor the Fed closely and will continue to monitor its actions and statements to determine if any adjustments are necessary for our asset allocation.
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The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy.
The Federal Reserve via Flickr.