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May economic outlook: The Fed keeps its eye on interest rates—so can you.

Quick takeaways

  • Hiring in hard-hit sectors is finally picking up, pointing to more positive signs for the economy—if the U.S. can keep a COVID-19 resurgence at bay, it will help the globe, too.
  • The Fed has promised to keep interest rates low which means that Americans who may have withheld big purchases still may be able to access to funds at very low interest rates.
  • Although low interest rates translate into low return on savings, there are steps you may take to make your money work harder and earn more.

There’s a clearer picture coming into view of how the United States economy—and portions of the globe along with it—may trend over the next few months. Although there are still worries about everything from inflation to COVID-19, those are increasingly balanced by expectations of growth and a rebound, particularly in places like the U.S.

The timeline may be uncertain, but one thing that will affect the picture in your own economic outlook? What happens to interest rates in the near and long term. Here’s what to watch.

Interest rates: From the Fed to you

Eight times a year, the Board of Governors of the U.S. Federal Reserve (Fed) meets to discuss policies. But the decision that’s anticipated the most is the vote on the federal funds rate.

Think of the federal funds rate as the baseline for much of the economic activity that happens across the country. Right now, it hovers around 0.25%1—much lower, of course, than even the very low rate you might have on your mortgage.

So how does that rate get from the Fed to your 3% (ish) home loan?

In a nutshell, the Fed makes money available to financial institutions at the federal fund rate. Those, in turn, lend money to one another at another rate, before finally lending it to you and millions of others at a consumer rate. Rates increase from the Fed to financial institutions, and from financial institutions to you, to pay for daily business operations and generate profits.

Traditional savings rates—also offered by financial institutions—are low because there’s less motivation for them to pay you to hold onto your money.

The rateWhat it isWhat the rate was on April 30, 2021
The Federal fund primary rate
What it is
Rate banks charge one another to borrow or lend excess cash reserves overnight
What the rate was on April 22, 2021
0.25%2
Bank-to-bank rate
What it is
Interest rates that banks nationally and globally use to lend to one another
What the rate was on April 22, 2021
0.28% (1 year)3
Consumer borrowing rate
What it is
Rate financial institutions charge consumers on lending vehicles such as mortgages, car loans, etc.
What the rate was on April 22, 2021
3.11% (30-year, fixed)4
Consumer savings rate
What it is
The rate on easily accessible options such as traditional savings accounts
What the rate was on April 22, 2021
0.5% APY 5

Remember how we said that the federal fund rate is the baseline for economic activity? Here’s why: By the time money from the Fed gets to you, it’s still “cheap” when the federal fund rate is low. Then “we borrow more—because we can, and because it doesn’t cost us so much,” says Heather Winston, assistant director of financial advice and planning at Principal®. “All those things are economic stimulating activities.”

Your wallet: If you’re in the market for a loan for a big-ticket, long-term item such as a home or vehicle, shop around. The consumer rate varies from one financial institution to the next, and even a quarter of a percentage rate can make a big difference in your monthly payment, especially over the life of a longer loan.

Interest rates: For the things you want to own

If you had the unfortunate fate to apply for a home mortgage loan in February of 1981, you would’ve paid a whopping 17.6% in interest.

Today’s rates pale by comparison, hovering at around 3%. That’s not likely to change for the foreseeable future, Winston says. The Fed is much more focused on spurring a recovery in our pandemic-scarred economy than it is on the economy overheating, even in the short term.

How short that short term is depends. Winston sees the possibility for a quicker job rebound in some hard-hit sectors of the economy. “There may start to be more of a question of when the Fed will evaluate raising rates,” Winston says. “Some thought they will do it before 2024, but a lot of it depends on how all these pieces fit together.”

Much like the Fed doesn’t make its decisions in a bubble, you don’t either. You’re probably constantly prioritizing and re-prioritizing. “We’re at a point now where the temptation is there, but money isn’t free, and there’s more than just the interest rate to consider,” Winston says. “There’s a benefit to being more conservative than going to the extreme. Balance is key.”

The Fed is much more focused on spurring a recovery in our pandemic-scarred economy than it is on the economy overheating, even in the short term.

Your wallet: Interest rates are low, and probably will be for the near term, but the size of any loan and the long-term cost to you are two factors to carefully consider.

Interest rates: For saving

While the Fed’s approach to interest rates offers borrowing benefits, it’s balanced out by the less-than-stellar impact on savings. That’s because a low Fed rate also translates into a low rate for everything from traditional savings accounts to certificates of deposits.

Financial pros know this, and that’s why so many advocate an asset allocation approach to retirement accounts—meaning you’re investing money across a mix of asset classes with different levels of risk and reward.

Whether or not you realize it, you’re already practicing asset allocation with non-retirement funds, too. You’ve spread out your debt or risk—a mortgage with one interest rate and due date, a car loan with another, for example. You may have also distributed savings, with a checking account that may earn one rate and a traditional savings account that earns another.

“It’s about using your money in different places and in different ways,” Winston says. “Most people save and then spend, but if you can save and spend at the same time, while saving more and spending less, that’s a good objective.”

Most people save and then spend, but if you can save and spend at the same time, while saving more and spending less, that's a good objective.”

Heather Winston, assistant director of financial advice and planning

Your wallet: Laddering is a strategy that investors use to manage risk and stagger maturity for tools like bonds. (It may also be referred to as a barbell or bullet strategy.) You can adapt it to your own savings to get more from today’s rates.

It works by having different types of accounts with different rates to maximize growth and maintain liquidity. For example, if you have $2,000 to save, $1,000 could go in a traditional savings account and $1,000 could go in a 12-month certificate of deposit. If the Fed increases rates and you have extra money to save, put it in higher-interest accounts.

Get the help you need. A financial professional may talk you through how changes to your financial goals can shift your saving, especially for retirement. Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.

1 https://www.federalreserve.gov/monetarypolicy/openmarket.htm

2 https://www.newyorkfed.org/markets/reference-rates/effr

3 https://www.bankrate.com/rates/interest-rates/1-year-libor.aspx

4 https://www.bloomberg.com/markets/rates-bonds/consumer-interest-rates

5 https://www.bankrate.com/banking/savings/rates/

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