What The Fed Cutting Interest Rates To 0% Means For Young People
The Federal Reserve has been cutting interest rates and it has been raising alarms. But what does this really mean for young people?
The Federal Reserve cutting interest rates is going to affect the interest rates on your savings, money market, and other interest-bearing accounts. Along with that, your credit card interest rate may drop as well as variable rate loans you may have like a home mortgage or auto loan.
To many, the Federal Reserve is a great mystery. I want to help you understand the basics of what it is and what they do.
Picture the Federal Reserve as a big pot of money that everyone can request to borrow from. They control our money supply and where/how that money gets sent out.. They are the central bank for the United States and make sure smaller banks have access to capital through credit and loans for people like you and me. Often people confuse the Federal Reserve and the U.S. Treasury.
They are not the same thing.
While they do work together, the Treasury is where the actual physical money is made. Literally, they print it and put it into the economy through the Federal Reserve.
The Fed is who you interact with (in a round-about way) when you get an auto loan from a local bank and they then go to a bigger bank to get the money. That bank goes to a bigger bank who eventually ends up at the Federal Reserve.
While you may be borrowing money at an interest rate of 3.5% every bank up the food chain is borrowing it at a slightly lower rate. They do this because each one needs to make money to stay in business. Including the Federal Reserve.
This article isn’t an outline of how the Federal Reserve works though. In this post I want to take you through the impact of the Federal Reserve cutting interest rates may have on younger people specifically.
Why Did The Fed Cut Interest Rates?
To understand why the Federal Reserve has continuously cut interest rates over the past couple months and why it affects you, I want to give you a big picture description.
When interest rates are low, it is more likely that businesses and people will go buy things. When people buy things, it stimulates the economy and makes the wheels turn.
For example, I’m more likely to buy a home at a 3% interest rate than 6% because I know I’m going to save thousands of dollars over the years.
If the Fed believes we are headed towards a slow time in the economy or worse, a recession like 2008, they will lower rates.
Their hope is that the lower rates will incentivize more people to go out and buy things. Basically like a jump start for the economy.
On the other side of things, if the Fed decides the economy is growing at a pace that can’t be sustained then they will actually raise interest rates. That’s right, they will purposely try to slow down the economy. This is obviously met with a lot of push-back especially if you are in charge because if things are going well why should we stop it?
But their job is to make sure we move at a sustainable pace. Thus keeping things in balance.
At a macro view, that is what the fed does and you can now tell people you have a degree in monetary policy. Now on to the important question.
How does the Federal Reserve lowering interest rates affect you as a young person?
Mortgage Rates Have Gone Down… Then Up
Something that has mostly been talked about in the same sentence as the Fed cutting interest rates are mortgage rates.
What if I told you that mortgage rates aren’t tied to what the Federal Reserve does though? Because they aren’t.
Instead, they are tied to the 10-year treasury interest rate. I already gave you one short lesson in economics earlier in this article so I’ll spare you on this one. Just know they aren’t directly related.
If we look at historical data it does seem as if they are correlated and I can confirm this from my personal experience.
When we bought our duplex last month, we locked in a 30-year fixed-rate mortgage at 2.875%. That isn’t just low, that is STUPID low. Because rates were so low you saw a large influx of people scrambling to refinance their homes.
You probably know someone who did just that.
We decided to go with a fixed-rate mortgage and because of this, no matter what the Fed does in the future, our interest rate won’t move. It will always be 2.875%. But if you have a variable rate mortgage then your interest rate will fluctuate.
Your lender should be keeping you updated on this but if you aren’t sure, then take five minutes to give them a call. Because as I mentioned earlier your rates may be going down right now, saving you interest. But there is nothing stopping them from raising rates and it is something I believe will happen in the next couple of years.
If you have the means and are looking into buying a home, now may be a good time to get serious. If you’re able to secure a fixed-rate mortgage at a low interest rate, it will save you thousands of dollars over the years.
Your Saving’s Account Interest Rates Have Dropped
Over the last year or so I have been a huge believer in the online bank Wealthfront. I enjoy their product and how easy it is to use. The thing I appreciated most about them was their 2% interest rate they were offering on an online high-yield savings account.
Well that treat is gone.
And when I say gone, I mean long gone. In fact, that interest rate has dropped all the way down to .35%. In other words, they are no better than my local credit union.
On the bright side, this is an increase from the measly .26% they were paying a month ago.
Either way, I’m not thrilled about it and if you have an online savings account, then you may have been affected in a similar way.
Money Market, Certificates of Deposit (CDs), and other fixed-interest bearing accounts will also be affected. Again, if you locked in a rate then it will stay the same. But it is rare for a Money Market or online high-yield savings account to do that.
Credit Card Interest Rates
Credit cards are very similar to mortgages when it comes to rate fluctuations. They are tied to the decisions that the Fed makes and not the 10-year treasury but other than that they are quite similar.
Before we even discuss this let’s make sure one thing is clear. You should never, under any circumstances, ever pay interest on a credit card. That is the golden rule of credit cards and if you can’t follow it, then don’t bother ever opening up a card.
If you want to learn more about credit cards and managing them, go check out my article How Do Credit Cards Work? – A Simple Guide With Examples. Following the tips in that article can literally save you thousands of dollars, if not more, over your lifetime.
For instance, some of my credit cards have fixed interest rates. These range from 15% to 22%. Those rates will not change. The one card I do have that has a variable rate has changed and dropped it’s rate to 2%.
That sounds great but the overall interest rate is still over 20% so in the grand scheme of things, its a pretty awful deal.
If you are going to use credit cards, I beg you to educate yourself on them first. They can be a powerful tool but also a dangerous one. It’s not worth getting some extra credit card rewards if it means you’ll be in debt for years.
Learn more here:
- Are Credit Card Rewards Worth It? – Cash Back, Travel, and More!
- Are Annual Fee Credit Cards Worth It? – Why I Pay $800 A Year
The Bottom Line
If you aren’t planning on making a major purchase like a home or car, then the fed dropping or raising rates will have little impact on you. If you are young, then you have a lot of life ahead of you still.
Can your mortgage rate change? Sure
But it could also swing the opposite direction in a matter of months.
Instead of worrying about the Fed raising or lowering interest rates, I would suggest you focus on the things you can control. The amount you are saving/investing, making a budget, find new sources on income.
Take a course like Money Made Easy that educates you on all of these things and more.
All of these tasks are in your control and often neglected. Instead, we turn to the flashy headlines and put the blame elsewhere. Now, I’m not taking away from the significance of the Fed dropping rates as low as they did but I can’t call up Jerome Powell (Chairmen of the Fed) and complain.
So why worry?
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