Not all that long ago, the only major decision the Federal Reserve Board had to make was where to set short-term interest rates. But in the past decade, the Fed has become increasingly aggressive in its efforts to pump up the economy—and there’s no sign it will slow down anytime soon. Whether you’re a borrower, saver or investor, this matters to you.Interest Rates at Zero
Some history: As the economy cratered in 2008, the Fed made the unprecedented move of purchasing large sums of Treasury bonds and mortgage-backed securities, which pumped an extra $1 trillion into the economy. Over the course of the next 10 years, it purchased an additional $2.5 trillion. Then, when the coronavirus crisis hit, the Fed purchased another $3 trillion in bonds and securities, bringing its liabilities so far to a record $7.2 trillion. (The total size of the U.S. economy is currently $21.5 trillion.)
And the Fed isn’t done. It now has the authority to support up to $2.6 trillion in new lending, which includes making loans to businesses through its Main Street Lending Facility and lending to city, county and state governments through its Municipal Liquidity Facility. The Fed is also backing loans issued through the Paycheck Protection Program, a federal loan-forgiveness program designed to help small businesses survive the coronavirus pandemic.
As for interest rates, it’s likely they will remain low for a very long time in order to encourage borrowing and keep the money flowing. Fed chairman Jerome Powell announced at the June 10 meeting of the Federal Open Market Committee that the coronavirus could continue to have an impact on the economy for the next two years and that the Fed isn’t likely to raise interest rates until 2023 at the earliest. If inflation remains contained, rates could stay low for even longer. However, although the European Central Bank has experimented with negative interest rates by allowing commercial banks to borrow at negative 1%, the Fed isn’t inclined to go that far.
Good news, bad news. Borrowers will benefit from the low-rate environment. The 30-year fixed mortgage rate is likely to remain below 4% for the foreseeable future (although home prices typically rise faster when rates are low). Auto, home-equity and other consumer loan rates will also