What sustained low interest rates could mean for the economy and your wallet.
Today’s extraordinarily low interest rates have created a window of opportunity, as consumers and companies take advantage of cheap borrowing costs and homeowners rush to shave money off their mortgage by refinancing.
But there are two sides to every coin: This trend makes it that much tougher for savers looking to earn enough interest on their cash reserves to stay ahead of inflation. Right now, spending is the priority for pandemic crisis recovery, and so the Federal Reserve has announced it plans to keep interest rates near zero until at least 2023.
With Americans’ personal savings rates at historic highs, there comes an urge to “do something” with idle money – or to reconsider the ratio of stocks to bonds in a portfolio, given the muted prospects for fixed income. Here we offer a dose of perspective on navigating this environment.
The echo of “lower for longer”
In the U.S., the central bankers at the Federal Reserve have control over what’s called short-term interest rates, the rate banks charge one another to borrow money for a day. In general, every other interest rate is affected by what the fed funds rate is, from the return on your savings account to the rates charged on a mortgage. Cut that rate and it’s less expensive to borrow money. Raise the rate, it becomes more costly to borrow, and people will tend to save more. It’s one tool the Fed uses to pursue its goals.
“The Fed has two goals, maximum employment and stable prices – and by stable prices we mean inflation around 2%,” said Scott Brown, Raymond James chief economist. After a series of listening sessions across the U.S., the Fed announced in August that it would now try to achieve inflation that averages 2% – meaning that if there is a period well below the target 2%, you need to run above 2% to balance that. “This suggests a somewhat higher tolerance for inflation, somewhat higher tolerance for low unemployment as well,” said Brown. “Putting it in the statement was sort of banging the gong.”