The Fed’s interest rate cut could boost loan products

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The US Federal Reserve slashed its interest rate target by one percentage point to near zero (a lower limit of 0% and an upper limit of .25%) on Sunday in an emergency response to the coronavirus pandemic, The Wall Street Journal reports.

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The emergency rate cut was the Fed’s second in two weeks, after it reduced its guidance by half a percentage point on March 3. The Fed’s rate-setting committee says that it now plans to hold its rate at the new low level “until it is confident that the economy has weathered recent events and is on track.”

The changing Fed rate is likely to yield a benefit to consumers on loan and credit products. Because the Fed rate affects the cost of borrowing, changes can ripple through to consumer-facing products. For example, after the Fed’s first emergency rate cut, mortgage rates hit their lowest level on record: The average rate on a 30-year fixed-rate mortgage was 3.36% for the week of March 12, and the average rate for a 15-year fixed-rate mortgage was 2.77%, per data from Freddie Mac cited by the Journal.

In a similar vein, a decline in federal interest rates can also affect the APR on credit cards, which are decided based on a broad market rate plus a margin decided by each card company (which averaged 12.13 percentage points as of November 2019, per an analysis of Fed data by WalletHub.com cited by the Journal). The Fed rate change could affect the broader market rate, leading to lower APRs, provided card lenders don’t choose to hike their margins. 

But a near-zero rate is likely to cause negative effects for banks when it comes to savings products, especially challenger banks that offer high-yield savings accounts. A slipping Fed rate will encourage more loan activity from banks and discourage them from offering high interest rates on savings accounts for the sake of profit margins. This will likely put the most pressure on banks that use high-yield savings accounts to generate new business to lower their rates.

We’ve seen similar occurrences before: Ahead of anticipated cuts last August, Goldman Sachs’ Marcus digital bank reduced its interest rate from 2.25% to 2.15%, and its rate has since slid even further, to 1.7%. The more that banks like Marcus have to reduce their rates, the less they’ll be able to stand out from competitors and lure in customers with the promise of better return on their savings than they would see with incumbents.

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