The Fed’s New Approach to Inflation (and How It’ll Help You)

In line for another credit card? What about a home equity loan or some other type of personal loan?

If you answered “yes” to either of these now or expect that one of these loans may apply to you at some point in the future, then you’re in luck – and it’s all thanks to a policy about-face that the Federal Reserve recently announced.

Specifically, “the Fed” has stated that it will allow inflation to run its course at “hotter than normal” rates in an effort to help the economy rebound faster from the fallout over the coronavirus pandemic. And as a result of these actions, qualified lenders can expect low interest rates for years to come. According to economists, it’s a type of policy that encourages spending and activity in the money market – and it’s a bit of a reversal from how the Fed had previously stated it would manage things as the economy looks to recover from the pandemic fallout.

A Stimulus to Encourage Spending?

According to lenders, the average personal loan interest rate is about 12 percent, and home equity interest rates are under 5 percent. Furthermore, today’s average credit card rates are at about 16 percent. Per the Fed’s new announcement, consumers can expect these rates to stay lower for longer periods of time. These rates will also likely be lower more often than not. The experts want consumers to think of these low rates as somewhat of a stimulus, that is a way to entice spending. This benchmark rate that the Fed sets plays a role in just about every borrowing and savings rate that is offered today. While there are some ebbs and flows depending on the lender and what type of loan it is, think of the Fed’s policy as somewhat of the anchor behind it all.

Not All Good News for Consumers, Investors

However, while these low rates may seem like a positive for many things, they are going to present some difficulties as it pertains to mortgage rates and others. That’s because as inflation burns “hotter than usual,” mortgage rates are also likely to go higher. Inflation isn’t exactly going to be ideal for those who invest in bonds, either – as investors may see big declines in the near-term, especially for long-term bonds.

It’s projected that bankers will target about a 2 percent inflation rate in the near term, which will have both good and bad effects. The good will unquestionably come in lower APR on credit cards and other types of small loans. But your savings account likely won’t experience the gains that it has in the past and mortgage rates could go up. How long it lasts will depend on how long the recovery from the COVID-19 pandemic takes.

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