The Times Herald (Norristown, PA)
Here’s what the Fed emergency rate cut means for you
WASHINGTON » In normal times, a cut in the Federal Reserve’s benchmark interest rate would be met with enthusiasm by borrowers, because it means that the cost of credit is coming down.
But these aren’t normal times.
On Sunday, the Federal Reserve announced it would cut the federal funds rate to a range of 0% to 0.25% in an effort to encourage the flow of credit to consumers and small businesses. The move landed like a thud.
Businesses are closing and consumers are being asked to sequester themselves at home to help slow the spread of the novel coronavirus. People are purchasing less and, as a result, the rate cut’s impact will be blunted, according to several experts I interviewed.
Yes, credit is on sale, but it won’t make much difference if you can’t afford to buy anything -- even if the cost of your borrowing has gone down. If you’re laid off and can’t make even your minimum credit card payment, a small reduction in your interest rate isn’t going to have you jumping for joy.
“The truth is that if you’re somebody whose financial life has really been turned upside down by the coronavirus, the Fed rate cut isn’t really going to do a lot of good, because the rate reduction doesn’t even get passed along for another couple of billing cycles,” said Matt Schulz, chief credit analyst with LendingTree.
Once they roll out, lower credit card rates won’t make a dramatic dent in people’s debts overall. Take someone who has a credit card balance of $6,000, with an interest rate of 20%, and is paying $200 a month. Schulz points out that, over the life of the balance, a one-percentage point rate reduction is going to save the person a mere $183.
“What really could help consumers are monthly payment deferrals, Schulz added. “We need to see banks step up and offer to you to allow people a break from paying that payment for a month or two.”
Still, with the U.S. facing months of economic uncertainty, eventually the rate cut could benefit many borrowers, said Greg McBride, chief financial analyst at Bankrate.com.
“Somebody who’s worried about losing their job probably won’t be running out to buy a car just because the Fed cut rates,” he said. “But six months from now they might. That’s the point at which we’ll need juice for the economy.”