August 9, 2019

TAGGED AS: Credit 101

The Federal Reserve Bank (the Fed) increased short-term interest rates from 0% to 2.50% since 2015. Prior to that, the Federal Reserve hadn’t raised rates in over a decade. Expectations as recently as early this year were for rates to continue to rise; however, the Fed has taken a more wait and see “dovish” posture since then. Many speculated that rates may decrease in July or September. On July 31, 2019, the Fed acted and reduced the Fed Funds rate by 0.25%. Future rate changes are difficult to predict and depend on how the economy performs. Here’s a little more about how rate changes could affect you.

How do changing rates affect me?

When the Fed lowers or raises rates, loan and savings rates are affected – both will go up or down in alignment with the changes. Fed rate decreases means borrowing money will be less expensive but deposit rates are likely to decrease so you may not earn as much on savings. When the Fed raises rates, loans become more expensive but you can earn more with certificates and deposits.

How do I borrow in a changing rate environment?

Rate changes are unknown – they could continue to fall slowly over the next few years, making it more affordable to purchase a new home or auto. They could also increase which could make those purchases more challenging.

If you are considering buying a home now, you may choose to lock in a fixed rate mortgage or choose a variable rate.  Fixed rates provide a fixed payment and peace of mind that, if rates increase, your payment stays the same.  Variable rates provide the benefit of a lower rate and payment when rates fall, but will see an increase when rates rise. 

Most auto loans offer fixed rates, which means you would have to refinance the loan to take advantage of lower rates.  Auto refinances are relatively straightforward, so contact your Credit Union or lender to discuss options.  

How do I invest in a changing rate environment?

Lower interest rates generally stimulate economic activity and make purchases of all types more affordable. Lower rates will support or even increase real estate values and other appreciating assets.
While shorter-term certificates of deposit typically pay less than longer terms, many consider an investment in shorter-term certificates preferable if the economy is slowing, to make sure the funds are readily available in case of need, or an attractive opportunity to buy or invest presents itself in the future. 

Should I expect another recession?

Although no one knows when a recession will happen, history teaches us it will eventually. Recessions are a normal part of the economic cycle, like a pendulum swinging. Most economists agree that if we do have a recession in the near future, it is likely to be mild, no one expects another sub-prime lending crisis. We recommend that you manage debt wisely and schedule regular deposits to your savings to build up savings over time. Consistency is paramount to financial success. 

If you’d like to speak us about how to optimize your current loans, savings or investment accounts, you can schedule an appointment at one of our branches or simply call us at (800) 649-0193. We’re happy to help.