The Federal Reserve is holding its target interest rate in a range of 0.00% – 0.25%, even while the economy begins to recover from the Coronavirus Pandemic.
At least one member of the Federal Reserve system believes that this could stay the same in the coming years if inflation remains low.
Inflation Will Guide the Interest Rate
Charles Evans, the President of the Chicago Federal Reserve, talked about the interest rate in an online presentation this week, saying that “I suspect that it might be 2024 before we actually raise the interest rate target.”
Evans said that inflation remains low, and that he would feel “comfortable” with inflation up to 2%, and that the Fed wouldn’t need to respond until it started to approach 3%.
Inflation has been a major concern for investors in 2021, although mainstream economists have repeatedly stated that it remains manageable and that it isn’t likely to outpace economic growth.
Will a Low Fed Rate Benefit the Average Consumer?
While the Fed’s benchmark interest rate has an impact on the wider lending economy, it’s not the same rate that consumers or even businesses will see when borrowing money. Consider the 30-year fixed mortgage rate today, which averages at 3.99% in a range of 3.13% to 7.84%, and it’s easy to see the disparity between the Fed’s rate and those offered by commercial lenders.
The Fed’s rate can influence the prime rate, which is the rate that banks offer to their customers with the best credit. When the Fed’s rate increases, the prime rate, and therefore real rates, typically increase with it.
However, with the Fed rate being stagnant over recent quarters, we have still seen increases in mortgage and general finance rates. This is because lenders are more optimistic about the economy and believe that rising employment figures will support higher interest rates.
So, while the Fed rate is low, consumer-facing rates could still increase, even if the Fed doesn’t change anything. People looking to use finance to invest in property should consider applying for loans as soon as possible to take advantage of the prime and general market rates today.
If inflation and the economy start to grow at a faster rate, the low-rate environment won’t hold for long.
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