On March 3, the Federal Reserve voted unanimously to cut the primary credit rate by 0.5%, setting the new benchmark interest rate between 1% and 1.25%. It was, as CNN noted, the first emergency rate cut since the financial crisis.
The move was, CNN added, “a bold attempt to give the US economy a jolt in the face of concerns about the coronavirus outbreak.”
The rate chop was immediately challenged by outside economists, who said cutting interest rates was not the most effective policy to fight virus-caused challenges. But banks and lenders, however, should see an uptick in consumer activity.
A Rush to Refinance?
While federal funds and mortgage rates are not strictly linked, the fed’s rate drop will likely lower what are already incredibly low mortgage rates, and that will help those who want to refinance, people who are about to buy and shopping for a loan, or those who have adjustable rate mortgages.
But how low will rates actually go? Mortgage rates hit an all-time low after the March 3 rate cut, notes MarketWatch, with the rate on a 30-year fixed falling to 3.29%. It’s unlikely they can go much lower than that—perhaps into 2.9% territory—since, as Mark Fleming, the chief economist at First American Financial Corp., told Yahoo News, fixed costs, from servicer to originator, account for at least 1.5% of a loan.
While the lower rates mean that buyers can finance $25,000 more for the same monthly payment than they could just a few years ago, it also means that mortgage holders could instead move from a 30-year term to a 20-year or 15-year term for about the same amount of money.
What About Credit Cards?
Since the annual percentage rate on most credit cards is variable, rates for consumers with account balances will likely fall, notes Forbes.
“Credit card rates will probably fall about 50 basis points within the next month or two, but that won’t have a significant effect on borrowers,” said Ted Rossman, an industry analyst at Bankrate. “Even if the average credit card rate falls from its current average of 17.35 percent to 16.85 percent, that will only result in $2 of monthly savings for someone with the average credit card debt ($5,700, according to the Fed) making minimum payments.”
Are Savers Doomed?
The rate cuts do hurt one segment of the population, of course—savers—and that goes not only for those with savings accounts and large checking accounts but also CDs.
Top savings accounts now pay less than 2%, and most pay much under that. There’s now talk that rates in the U.S. could go negative.
While that’s bad news in many respects, it does open the door for banks to offer customers alternative savings plans, including CD laddering, traditional and Roth IRAs, and even HSAs.