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What the 2019 Federal Reserve interest rate reduction means for you

On Wednesday, September 18, 2019 the Federal Reserve reduced its benchmark federal funds interest rate for the second time in two months.

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This change in rate can be beneficial for your wallet and existing accounts. The Federal Reserve typically reduces interest rates when they are concerned about the direction of the U.S. economy, inflation, and/or unemployment. While the United States economy is still far from a recession, economic trends are declining around the globe and in the United States. In the face of a slowing global economy and the China Trade War, Jerome Powell, the current chair of the Federal Reserve, describes his decision to cut interest rates as a “mid-cycle adjustment to policy.”

So what does that mean for you?

Loan interest rates are probably going to decrease.
Let’s start with the good news. Loan interest rates will likely decrease depending on the type of loan and the term. Variable rate loans will float alongside the federal rates and new loan rates will likely start off lower. It is reasonable to expect interest rates to decrease on credit cards, mortgages, home equity loans, car loans, and other consumer loans in the coming months.

If you have private student loans you may be paying less in interest.
If you took out private student loans and have a variable interest rate, you may see your interest rates decreasing in conjunction with the federal interest rates. It also may be a good time to review your loan documents to determine whether or not you can refinance without accruing a penalty.

Your savings may earn less money.
On the other side of the coin, with the Federal interest rate reduction, it is likely that your financial institution will follow by cutting deposit rates by roughly a quarter of one percent. This means that if you were previously earning two percent (2%) on your savings, you will now only earn one point seven five percent (1.75%).

Future reductions may be made.
Historically, when the Federal Reserve has reduced interest rates, they do so at least three times. While Chairman Powell was not clear if the Federal Reserve intends to follow this pattern, consider the potential of further interest rate reductions and whether or not it would be beneficial to wait to make any major financial decisions. Your loan officer can help you evaluate your needs and make a plan that is best for you.

So what should you do?

Don’t jump ship on your savings accounts.
Even though your savings will earn less interest, don’t immediately invest it into riskier assets in an effort to obtain a higher yield. Evaluate the reason you are saving. Is it for long term needs or short term? Are you saving to purchase a home or car within the next few years? Are you building a safety net for a rainy day? If the answer is “Yes”, you are better off leaving the money in savings and not risking the loss. However, if you are savings those funds for a future goal, such as retirement, then it may be worth moving some of your savings and investment into high quality stocks or bonds with a higher potential return, as you will have more time to recover any potential losses.

Now is a good time to be more aggressive when paying off debt.
With the likelihood of credit card interest rates falling, along with a reduction in savings interest rates, now is a good time to pay off more credit card debt. The same amount of money you otherwise pay on your credit card bill will now pay off more principal rather than accumulated interest on the debt. This is a great opportunity to reduce your current balances.

Now may be a good time to refinance your loans.
With declining interest rates, now may be the time to obtain a lower fixed rate on your mortgage. Review the terms of your loan and speak with your loan officer to determine if refinancing will save you money on your monthly mortgage payment. Similarly, if you have a private student loan with a higher fixed interest rate, it may be worth reviewing to determine whether or not you can refinance and obtain a lower interest rate.

Talk to your loan officer or financial institution about your options.
The terms of almost every loan is different and specific to the borrower. With declining interest rates, now is a good time to speak with your loan officer or a financial advisor about how these changes will impact your loan(s) or other debt and what benefits you may obtain from a new loan or refinancing an existing loan. Fully understanding the impact of the interest rate reductions and, likely, additional reductions, on your financial situation will not only give you peace of mind, but may also give you a little more money in your pocket.

If you have specific questions about these changes or would like to learn more on the direct impact of the rate cut on your finances, come in and see us! We’d be happy to talk though a strategy that makes the most sense for your financial plan.

The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.