The Fed keeps rate steady. Heres how that benefits short-term borrowers

 cnbc.com  09/16/2020 18:03:18   Jessica Dickler

TheFederal Reservesaid Wednesday it would keep its benchmark interest ratenear zerofor as long as it takes to help the economy bounce back from thecoronavirus crisis. The Fed said the ongoing coronavirus pandemic will "weigh heavily" on the near-term outlook and poses "considerable risks" for the medium term.

In addition to holding rates near rock bottom,the central bank recently said it will allow inflation to run "hotter than normal" before ever hiking rates again, letting borrowers benefit from cheap money indefinitely.

"Interest rates are extraordinarily low and they are going to stay that way for a long time," saidLaura Veldkamp, a professor of finance and economics at Columbia University Business School.

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Although thefederal funds rate,which is what banks charge one another for short-term borrowing, is not the rate that consumers pay, the Fed's moves still affect the borrowing and saving rates they see every day.

In general, lower than normal interest rates are great for borrowers, but not so good for savers, who will see less reward for their savings, according to Richard Barrington, senior financial analyst at MoneyRates.

Here's a breakdown of how it works:

Mostcredit cardshave a variable rate, which means there's a direct connection to the Fed's benchmark rate.

Since the Fed started cutting rates a year ago, credit card rateshave hit a low of 15.99%, down from a high of 17.85%, according to Bankrate.

However, "don't expect card APRs to stay low forever," said Matt Schulz, a credit industry analyst at CompareCards.

With less revenue coming in from high-annual-fee travel rewards credit cards, banks may raise interest rates to make up the difference, he said.

"That means that if you're in the market for a new card, now would be a good time to act."

The same goes for other types of short-term borrowing. For example, the average interest rate on personal loans is currently about12.08%andhome equity lines of creditare as low as4.56%, according to Bankrate.

Although student loan balances are swelling,college debt is going to be cheaper overall.

Based on an earlier auction of10-year Treasury notes, the interest rates on federal student loans taken out during the 2020-21 academic year are at anall-time low.

For those already struggling with outstanding debt, the CARES Act offered some relief by pausing payments on federal student loans until the end of the year.

Private loans may have a variable rate tied toLibor, prime or T-bill rates, which means that when the Fed holds rates down, those borrowerscan benefit as well, depending on the benchmark and the terms of the loan.

With interest rates now at record lows, it could be a great time to refinance private student loans or ask your lender what options are available.

Longer-term loans are cheaper than they have been in years, but the Fed's new approach to inflation will chip away at the ability to benefit before long.

Currently, the average 30-year fixed rate home mortgage is near arecord low3.11%, according to Bankrate.The economy,the Fedand inflation all have some influence over long-term fixedmortgage rates, which generally are pegged to yields on U.S. Treasury notes.

"Low inflation has helped suppress mortgage rates," said Tendayi Kapfidze, chief economist at LendingTree, an online loan marketplace. "If you let inflation go up, mortgage rates will also go higher."

That makes this a good time for refinancing your mortgage, as well. Soon, consumers will have to pay more to refinance after Fannie Mae and Freddie Mac announced that they are raising fees to shield them both from the additional risk brought on by the coronavirus pandemic.

"Savers got kicked in the shin," Greg McBride, the chief financial analyst for Bankrate, said of the Fed's new interest rate policy.

Although the Fed has nodirect influenceon deposit rates, those tend to be correlated to changes in the target federal funds rate.

Now, according to the Federal Deposit Insurance Corp., the average savings account rate is a mere 0.05%, or even less, at some of the largest retail banks.

When the inflation rate is higher than savings account rates, the money in savings accounts loses purchasing power over time.

At the very least, Barrington advises switching to a savings account with ahigher rate, whichcan keep up with inflation.

For near-retirees, this is even more important. "If you are a retiree that's trying to generate income, you are getting peanuts on the cash and fixed-income portion of your portfolio," McBride said.

To earn a better return on your retirement savings, you may need to look far beyond Treasurys in your pursuit of income.

"Most people have gotten the message they should probably hold some stocks and bonds," Veldkamp said. "Although it's been a wild ride, they've probably come out OK."

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