Last updated on May 13th, 2020
The Federal Open Markets Committee has taken an extraordinary step, slashing interest rates to bolster the U.S. economy as the market reacts to coronavirus.
Jerome Powell, chairman of the Federal Reserve, announced yet another cut to the benchmark interest rate on Sunday March 15, 2020. Federal interest rates have now been lowered by a full percentage point to zero. The adjustment is accompanied by wide-ranging emergency quantitative easing due to the impact of coronavirus.
Interest Rates Drop, and The Fed Introduces Quantitative Easing
Before the weekend, federal interest rates ranged from 1% to 1.25%. As of Sunday, they are now 0% to 0.25%, effectively making them zero.
Additional steps taken by the Fed include:
- The buying of $700 billion in government and mortgage-related bonds
- The injection of $1.5 trillion into the bond market to ensure liquidity
- An emergency rate cut at the beginning of March, which this newest adjustment piggy-backs
These efforts aim to stabilize home loans, push down rates, and make borrowing costs as low as possible. As businesses across the country begin to close, many Americans are losing wages. Speculation is high – and the stock market has hit unprecedented lows.
Prediction: A “Significant Effect” on the U.S. Economy Due to COVID-19
The move follows on the heels of an emergency rate cut on March 3rd. The Fed seeks to keep the markets stable, as trading has seen dramatic ups and downs due to fear and speculation over coronavirus’s effect on the economy. Powell has said that he and his fellow committee members anticipate a “significant effect” as tourism slows and cities call for restaurants, bars to close. Large gatherings are also recommended to be postponed, which has seen concerts and music festivals, weddings, and other events canceled.
As of this writing, local governments have ordered that bars and restaurants close in five states. Ohio, California, Illinois, Massachusetts and Washington state aim to slow the spread of the virus by preventing citizens from congregating and being seated. In Ohio, restaurants can stay open for carry-out and delivery; California has also requested that those over the age of 65 self-isolate. The state of New York, in addition to a quarantine area, has also ordered restaurants and bars that serve food to only permit take-out and delivery orders. Florida has stopped short of closing these venues outright, decreeing that bars and lounges must not operate at more than 50% capacity.
How Does This Affect My Credit Cards?
A drop in the federal interest rate has a direct impact on the APRs that accompany credit cards. Credit issuers determine interest rates based on the prime rate. The prime rate is directly linked to the federal benchmark interest rate. When the federal rate rises, the prime rate adjusts, and rises accordingly; the opposite is also true. This means that since federal interest rates have been cut to zero, credit card holders may see lower interest rates for the next few weeks or months.
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