Prepare for Lower Interest Rates
For a little over a year now, the Fed has slashed the key fed funds rate from 5.25% all the way down to the current 1.5%. This is a fairly significant drop in a short amount of time, and while rates aren't expected to continue to drop, the Fed won't likely increase the fed funds rate as drastically as it was cut. This means the relatively low interest rates could be around for a while.
Good for Debt, Bad for Savings
Lower interest rates are good for borrowing money since it means you will be paying less in interest. The bad news is that the Fed rate cuts don't directly translate into lower rates for consumers. These cuts can take many months before the effects are felt on your bottom line, but you can begin shopping for lower rates now. Once you can begin to benefit from the lower rates, you'll have more money in your pocket as less is being spent on interest payments.
While lower interest rates saves you money when borrowing, the opposite is true when you are saving money at the bank. As interest rates fall, the rate of return on your checking, savings and CD accounts will likely follow suit. If you enjoyed the comfortable savings rates during most of 2007, you're probably not very excited as many rates have now dropped below the rate of inflation. If you can, make sure you're getting the best rate possible and explore other banks to ensure you're getting as much interest on your savings as possible.
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Comments
The dropping of interest rates to incredibly low levels of 1.5% have an interesting effect. While they sound good to consumers, not much money is actually lent out at that rate, because inflation is higher than that percentage.
While it is true that this can be great for consumers, it is weak for our economy in the long run.
The fed is not getting much gain out of the money it loans, and when rates do increase back to 5% (and they have to, eventually) consumers with variable rate loans will be incredibly impacted. If we don’t take advantage of the low rates now — not to get new stuff, but to fix our personal finances ASAP — then when it does go back up we will be in serious trouble.
Thanks for the information, and here’s to hoping that we can be smart now while we can.
–
Jerry
Jerry’s Frugal Living Tips
Funny,
Just today in the Savannah morning newspaper, there was an article saying the interest rates are actually going up…how bizarre, how bizarre…