Federal Reserve Announces New Approach to Inflation and Interest Rate Policy

Blog posted On September 15, 2020

The Federal Reserve announced revisions to its policy in the way it reviews inflation and the labor market.  These changes will impact how much interest consumers earn on savings accounts and pay on lines of credit and loans like credit cards and mortgages. 

According to the recent policy changes, the Fed will be less reactive to high inflation, raising the target inflation rate to an average of 2% over time.  This means that the Fed could allow inflation to exceed a 2% rate for an extended period of time. Additionally, the labor market will be more influential on interest rate policy.  For example, the Fed may raise rates before inflation picks up, if the job market strengthens. 

As a result of these policy changes, consumers may be looking at a lower federal funds rate, and some economists predict it could be years before there is another interest rate hike.  The federal funds rate influences the rate of interest on products like credit cards and mortgages but is not the only contributing factor.  Here’s what consumers can expect in the coming years. 

Credit Card Interest Rates

The annual percentage rate (APR) on credit cards is expected to go down or stay low for the foreseeable future.  Credit cards, designed for shorter term debt, typically carry one of the highest rates of interest, much higher than longer term debts like personal loans, auto loans, and mortgages.  Lower APRs could be good news for consumers who frequently use credit cards or are paying down credit card debt.  However, even as APRs decrease, they will likely remain higher than traditionally longer-term debt.  If you are struggling with credit card debt, you may still want to talk with a financial advisor about consolidating your debt with a personal loan.  

Savings Account Interest Rates

In a low interest rate environment, the interest savers earn on high-yield savings accounts and certificates of deposit will also trend downward.  Even so, these higher-interest rate savings accounts typically generate more interest than traditional savings accounts.  If you are trying to maximize your interest earned on savings, you may still want to consider a high-yield savings account.  When inflation picks back up, your rate of interest earned will also go up.  If you want to find the best interest-generating account for your savings, you should consult a financial advisor to review your options. 

Mortgage Interest Rates

Average mortgage interest rates are influenced on the federal funds rate, but not exclusively.  Average mortgage rates also depend on the long-term bond market and the demand for mortgage-backed securities.  Your individual mortgage rate will also depend on your credit score, the total amount of your loan, the size of your down payment, and other financial factors.   In a period of prolonged low interest rates, mortgage rates could remain low, but could also trend upward depending on the yield on the 10-year treasury note.  If you have questions about the mortgage rate on a new purchase or refinance, you should talk to a loan officer to get an accurate estimate. 

Today, average mortgage rates are historically low, and housing professionals expect rates to stay low through the end of the year.  If you have any questions about today’s rates, let us know. 

Sources: MarketWatch