The Fed Cut Rates to Zero!

Gwen Garrison |

Many are excited about the Fed dropping rates to zero in hopes they will benefit from lower interest rates on their loans.  And the Fed drop rates in hopes of protecting the economy.  It remains to be seen if consumers or the Fed's hope will be fulfilled.  Let's take a closer look at what occurs when the Fed reduces rates.

When the Fed reduces rates, this effectively reduces the rate that banks charge one another for overnight lending.  The Fed does this anticipating that the savings banks receive in borrowing will in turn lower their interest rates on loans and they will extend the savings to consumers.  This is a monetary tool designed to stimulate the economy.  In addition to the Fed slashing rates on March 14, they announced they would make an injection into the economy by buying at least $500 billion of treasury securities and at least $200 mortgage backed debt over the next couple of months.  It is too soon to know if the most recent rate decrease and quantitative easing will reduce market instability.

As for consumer lending, it is highly unlikely, that mortgage rates will go to zero percent.  There is still a great demand for mortgages at the existing rates.  In fact, many lenders are backlogged, and the current Coronavirus environment has only created additional stress.  There is no incentive for lenders, to reduce rates at the current moment because this would create additional backlogs.  Furthermore, it's hard for us to anticipate how consumer income and credit quality will be impacted during this crisis since we don't know how long it will last.  If it is longer than anticipated, will creditors provide relief for delinquent payments?  Additionally, social distancing and interruption of face to face activities may impede potential homeowners' ability to shop for homes.  Again, it is too soon to know how the most recent rate cut will impact the mortgage and housing industry.  At the best, the 30-year mortgage may benefit slightly.

Those who are positioned to benefit the most are student loan borrowers and credit card debt holders.  Although, the impact won't be immediate.  It goes without saying, we are all hoping that the emergency measures by the Fed and others will help to save the economy and individual household incomes.  In the meantime, we mush remain vigilant and institute emergency measures to weather the storm.

I encourage you to continue to follow our newsletter and our FB page to stay informed on suggested ways to provide financial security for your family and your business.  Gwen and I are also available to answer questions you may have regarding your financial portfolio and personal financial situation.  Visit our website at to schedule a call.