What it means when the Federal Reserve lowers interests rates

COVID-19 pandemic has impacted us in many different ways. Many individuals have lost their jobs because of it, while others had their hours cut. Around 205,000 individuals have passed away from this virus. Eight months of this on-going pandemic has also negatively affected the U.S. economy. 

The outcome of the pandemic 

In July, 31.3 million people reported that they were unable to work at some point in the last 4-weeks. As of July, 16.9 million (57%) people were unable to work. Even though these statistics are in some way outdated as of September, there are still people who are unemployed while others have returned to their work. The pandemic has people less willing to spend money on unnecessary things/trips. Causing many sectors in the economy like the traveling industry, airline industries, and other leisure industries to be highly impacted by the pandemic.

 Federal Reserve’s response to the economy 

On September 16, 2020, Jerome Powell from the federal reserve announced that they are strongly committed to achieving the monetary goals that our congress has given them. These goals are price stability and higher employment rates. The pandemic has not made raising the employment rate as easy as the goal may seem and instead challenged this goal. However, they have offered relief like unemployment and President Trump signing the H.R., 748 Cares Act (a $2 trillion coronavirus relief bill) on March 27, 2020, hoping the recovery is as easy as possible. With the pandemic in mind, which does not seem to be ending any time soon, the federal reserve has changed the policy statement to alleviate potentially severe damages of this pandemic and achieve the congress’s goals. The federal reserve has announced to keep interest rates near zero and plans to stay for three years (until 2023).  

 What do lower interest rates mean? 

When the Federal Reserve lowers the interest rate, it is a tactic to stimulate economic growth. One reason why the Federal Reserve decided to reduce the interest rate may be because they want consumers to spend more money. With lower interest rates, it makes it easier for someone to finance assets like houses or cars. When interest rates are lower, financing becomes cheaper for individuals to borrow or invest. It can also be helpful for someone who has a 401(k) account or an investor. The lowering of interest rates will affect your investment portfolio. One thing to be aware of, while the lower rates will increase your stocks, your bond prices will be the ones that will be lower.

The bottom line is that depending on if you are a borrower or saver, the lowering of interest rate may or may not benefit you.  

If you have any questions about the lowering of interest rates or your investments, please reach out to us! Email us at info@investedinterests.com