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What it means when the Fed cuts interest rates

Federal Reserve Board Chair Jerome H. Powell speaks to reporters March 3.
Federal Reserve Board Chair Jerome H. Powell speaks to reporters March 3. (Eric Baradat/AFP/Getty Images)
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In normal times, a cut in the Federal Reserve’s benchmark interest rate would be met with enthusiasm by borrowers, because it means that the cost of credit is coming down.

But these aren’t normal times.

On Sunday, the Fed announced it would cut the federal funds rate to a range of 0 to 0.25 percent in an effort to encourage the flow of credit to consumers and small businesses. The move landed like a thud.

Businesses are closing and consumers are being asked to sequester themselves at home to help slow the spread of the novel coronavirus. People are purchasing less, and, as a result, the rate cut’s impact will be blunted, according to several experts I interviewed.

Yes, credit is on sale, but it won’t make much difference if you can’t afford to buy anything — even if the cost of your borrowing has gone down. If you’re laid off and can’t make even your minimum credit card payment, a small reduction in your interest rate isn’t going to have you jumping for joy.

“The truth is that if you’re somebody whose financial life has really been turned upside down by the coronavirus, the Fed rate cut isn’t really going to do a lot of good, because the rate reduction doesn’t even get passed along for another couple of billing cycles,” said Matt Schulz, chief credit analyst with LendingTree.

Once they roll out, lower credit card rates won’t make a dramatic dent in people’s debts overall. Take someone who has a credit card balance of $6,000, with an interest rate of 20 percent, and is paying $200 a month. Schulz points out that, over the life of the balance, a one-percentage-point rate reduction is going to save the person a mere $183.

“What really could help consumers are monthly payment deferrals,” Schulz added. “We need to see banks step up and offer to allow people a break from paying that payment for a month or two.”

Still, with the United States facing months of economic uncertainty, eventually the rate cut could benefit many borrowers, said Greg McBride, chief financial analyst at “Somebody who’s worried about losing their job probably won’t be running out to buy a car just because the Fed cut rates,” he said. “But six months from now, they might. That’s the point at which we’ll need juice for the economy.”

With the drop in the federal funds rate, I’m hearing from a lot of folks wondering whether now is the time to refinance their home mortgage.

The average rate on a 30-year fixed mortgage hit an all-time low of 3.29 percent in the first week of March. But keep in mind that mortgage rates don’t necessarily track the Fed’s rate, according to Tendayi Kapfidze, chief economist for LendingTree.

“There is often a misconception that changes in the federal funds rate affect mortgage rates, but this is not the case,” Kapfidze said. “Rather, they are often influenced by the same factors, yet rarely to the same extent. At times, they even move in opposite directions.”

From 2015 to 2016, as the Fed increased its benchmark rate, mortgage rates actually fell, Kapfidze noted.

To his point, as refinance applications have recently been surging, the 30-year mortgage rate has been ticking up.

“The recent drop in mortgage rates inundated lenders with applications,” McBride said. “So there is a traffic jam to even get on the mortgage refinancing highway right now. A lot of the rates that lenders are posting are intended as a deterrent. There’s more demand than supply.”

But don’t panic that you’re missing out on the bottom. You don’t need to rush to refinance.

“The Fed can cut rates very easily, but they have a tough time taking that back later by raising rates,” McBride said. “The last time we saw rates at this low level [in December 2008], they stayed there for seven years. The stage is set for mortgage rates to remain at really low levels throughout 2020.”

Pausing will also give you time to shop around. And don’t just focus on the rate — compare the fees.

Not everyone is happy about the Fed rate cut.

The losers in an ultra-low-interest-rate environment are savers, many of whom are fleeing the jaw-dropping plunges of the stock market to the safe harbor of deposit accounts.

Another savings option worth considering is a no-penalty certificate of deposit. With this type of CD, you can make an early withdrawal without paying a penalty fee.

Following the past years of extraordinary market gains, it may pain you to park money in a relatively low-yielding deposit account. But think of it as a place to preserve your principal should you need to tap it in an emergency. And, Lord knows, these are dire times.

Have a question about retirement or personal finance? Join Michelle for an online Q&A every Thursday at noon Eastern time. Readers may write to Michelle Singletary at The Washington Post, 1301 K St. NW, Washington, DC 20071 or michelle.singletary To read previous Color of Money columns, go to