What Does Rate Uncertainty Mean for Your Personal or Business Banking?

The Federal Reserve is a foundational institution, but most public onlookers have only a vague sense of how the Fed's decisions affect their personal lives. Truth is, while the Fed does operate at a higher level of monetary policy, the actions it takes have a ripple effect in household and business finances across the country.

While that impact may not be apparent on the surface, rest assured it is there. Personal and business bankers may begin to see those changes as the Fed enters 2019 on an active streak, raising its primary interest rate at a faster pace than any point in the last decade, but perhaps too fast.

It's important to understand why a Fed rate hike matters to your savings, your mortgage or your business account, particularly as rate and economic uncertainty is the news of the day for America and much of the world.

What is the federal funds rate?

Banks and credit unions lend money to each other on an overnight basis to meet reserve requirements. The federal funds rate, controlled by the Fed's policymaking body, the Federal Open Market Committee (FOMC), is the target rate at which those overnight funds are lent. In turn, it's the prevailing value at which other short-term rate markets are then based. The rate a consumer gets for a credit card is indirectly tied to the federal funds rate.

Why does rate momentum matter?

The relation between the federal funds rate and the rate at which savings accrue interest in your account is simple. When the Fed's rate goes up, most all rate markets follow; when the benchmark rate falls, rates move downward in the same way. While rates might not move in lock step with Fed momentum and may take time to reflect those changes, in general, rates move when the Fed does.

What has the Fed done lately?

In the wake of the global financial crisis in 2008, the Fed took its rate to near zero to stimulate the economy . This is common central banking monetary policy: interest rates decrease during recessions to spur investment and lending, and increase during expansion to control inflation when economic data (like jobs) are strong. The Fed held its primary rate at zero for a long period after the Great Recession, making its first upward adjustment to 0.5 percent in 2015. 

While the Fed often makes incremental changes, raising or cutting rates by quarter points of a percentage, it made four such hikes in 2018 to around 2.5 percent. Encouraged by a strong domestic economy, the Fed soon sparked greater investor worry as the year closed down and stocks were sold off. Many blamed the Fed for acting too vigorously, and the central body even took a step back as 2019 began, saying it would move more cautiously . The most recent former Fed chair, Janet Yellen, even predicted the next decision could be a reduction .

Why the Fed rate matters to you

An interest rate near zero meant easy money. Low rates encouraged lenders to lend and borrowers to borrow, facilitating needed economic recovery, and consumers enjoyed the fruits of that policy decision for a long time. Mortgage rates were lower, as were car loans, credit card APRs and business financing. Spending was in favor. 

Now that interest rates are moving up, savings are the focus. An interest rate of zero means money is just sitting in an account, doing nothing. However, investing in a CD or other form of personal or business savings is a winning move when rates move up. Meanwhile, mortgage borrowers may want to think about the timing of an adjustable-rate loan and how Fed uncertainty can play a role.

Interested in learning more about how the Fed can impact your personal or business banking? Contact your local Vectra Bank representative today.

Let us know how we can help with your finance needs. Please contact your local Vectra Bank