What near-zero interest rates mean for your wallet

Posted March 16, 2020

The Federal Reserve cut interest rates to near-zero in an emergency move Sunday meant to make borrowing as cheap as possible as the U.S. economy feels the economic impact of the spread of the coronavirus (which causes COVID-19). The benchmark U.S. interest rate is in a range of 0% to 0.25%. The Fed also announced it will buy at least $500 billion in Treasury securities and $200 billion in mortgage-backed securities in the coming months as part of a quantitative easing program.

The reduction of interest rates, alongside the announcement of a $700 billion purchasing program, has not calmed investors. All U.S. indices opened sharply down Monday and continued to fall throughout the day, all closing down more than 10%. Though the economic impact of COVID-19 is concerning, the health and well-being of Americans and their families is a top priority. As a part of that well-being, there are steps Americans can consider to protect their financial standing.

While the Federal Reserve does not directly set interest rates on credit cards, mortgages and savings accounts, it creates monetary policies that indirectly affect these rates. That said, there are several potential opportunities for Americans to shore up their personal finances in light of the Fed announcement.

AICPA National CPA Financial Literacy Commission members Matt Rosenberg, CPA, and Sean Stein Smith, CPA, spoke with AICPA Insights about what the latest emergency rate cut means for Americans’ finances.

— Mortgages and home equity loans —

Matt Rosenberg (MR): If you are eligible and well-positioned financially to refinance your mortgage, it would be difficult to imagine a better time than now to do so. With rates, literally, at 0% working with your mortgage lender to refinance or possibly tap a home equity line of credit is something that might make sense. Mortgage/home equity debt is most likely the cheapest source of borrowing for individuals and can be used to reduce other outstanding loans, but it’s still important not to over-leverage. Even with low-interest rates, paying off all mortgage debt by retirement should be a goal for most people.

— Savings —

Sean Stein Smith (SSS): First and foremost, it is important to make sure that your money is working for you. This might involve taking a closer look at your savings accounts; regular checking and savings accounts might be yielding near 0% but locking in rates with a longer-term CD might give an extra 1% or even 2% than you otherwise might earn. Many banks and credit unions already started lowering CD rates after the first emergency rate cut earlier this month, so if this is a step you want to take, acting quickly would likely be in your best interest.

— INVESTMENTS —

MR: Lower interest rates mean people will get a lower return on their safe investments, so it can be tempting to seek higher returns by shifting to higher risk investments. However, people need to remember their financial goals and if they need safety (e.g., short-term investment horizon) then keeping those assets safe is more important than earning an extra few percent in interest savings. Investing is not a get-rich-quick scheme and trying to time a volatile market with hopes for huge gains is a serious financial risk.

According to AICPA research, nearly half of U.S. adults believe that a volatile market gives them an easy opportunity to make a profit. Higher risk does not equal higher returns, especially over short periods — it just means higher risk.

— Credit cards —

SSS: At the current time there has been no broad-based announcement or policy change with regard to credit card payments, but some organizations have moved toward increased flexibility due to the economic impact of COVID-19. Contacting your credit card company and inquiring about whether there is any flexibility, or plan to enact some flexibility, with regard to due dates and payment deadlines might be worth looking into.

— Inflation —

MR: Classically speaking, lower interest rates should lead to higher future inflation. This hasn’t necessarily been the case for the last 10–12 years but that doesn’t mean it won’t be in the future. Inflation is influenced by many other variables in addition to interest rates, which makes it hard to forecast more than a few months out. This emphasizes the importance of diversification across all asset classes for investors.

—

In these challenging times, it is more important than ever to effectively manage your finances and stick to your financial plan. Take steps to make sure you have enough cash on hand to pay for the basics in your budget. And remember, uncertainty is uncertain — that is why it is so important to have an emergency fund with readily accessible cash you can tap when needed.

The COVID-19 situation is moving quickly. In addition to monitoring health and safety guidelines from local and national authorities, make sure to stay on top of any available assistance from federal, state or local governments or community organizations that you or your family may need.

Association Staff

Related Stories