Learning Center


New Fed Policy Suggests Low Rates for the Long Term

After its meeting on August 27, 2020, the Federal Open Market Committee (FOMC) announced a new approach to controlling inflation through the benchmark federal funds rate. While affirming that it considers a 2% inflation rate optimal for promoting maximum employment, stable prices, and moderate long-term interest rates, the Committee indicated that it had more concern about persistently low inflation than high inflation and would seek to achieve inflation that averages 2% over the long term.1

In the past, the FOMC has increased the funds rate proactively to keep inflation from rising above 2%. According to the new strategy, when inflation has been running persistently below 2%, as it has for the past decade, “appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”2

What This Means for You

Although this may seem like a subtle change, it could have a significant effect on personal finances, investing, and the broader economy. To stimulate the economy in the face of the COVID-19 recession, the FOMC dropped the federal funds rate in March 2020 to its rock-bottom level of 0% to 0.25%, as it was during the Great Recession and the early years of recovery. At that time, there was concern that an extended period of low rates might cause high inflation, and the Committee began to increase the federal funds rate proactively in December 2015 and became more aggressive with increases over the next three years (see chart).

Controlling Inflation

The FOMC’s preferred inflation measure is the Personal Consumption Expenditures (PCE) Price Index, which tracks expenditures on a broader range of goods and services than the Consumer Price Index and reflects changes in consumer behavior. For its 2% target, the Committee focuses on “core PCE,” which strips out volatile food and energy categories that are less likely to respond to monetary policy. From 2015 to 2019, the FOMC raised the federal funds rate to keep inflation under its 2% target, but it will not be so quick to act under the new policy.
Federal funds rates hovered around 0.5% from 2010-2015, neared 2.5% in 2019, and sank back to 0.5% in 2020. Since 2010, Core PCE has been about 1% to 2.3%. The FOMC inflation target remained at 2% from 9/2010 to 9/2020.

Sources: Federal Reserve and U.S. Bureau of Economic Analysis, 2020 (data for the period 9/2010 to 9/2020)

Under the new policy, the FOMC is likely to be slower to raise the funds rate even if inflation begins to edge up over 2%. At its September 16, 2020, meeting, the Committee projected that the federal funds rate would remain near zero through 2023.3

This strategy will keep most other interest rates low. The federal funds rate directly affects short-term interest rates, including the prime rate that commercial banks charge to their best customers. The prime rate, in turn, serves as a benchmark for many types of consumer loans such as auto loans and credit cards. Mortgage rates have a more indirect connection to the federal funds rate and the prime rate, but they are likely to stay relatively low in a broad low-interest environment.

Low borrowing costs are generally good for businesses and consumers, which is why the FOMC drops rates to stimulate the economy. But low rates also mean lower yields on fixed-income investments, which may force investors looking for higher yields to take on more risk than is appropriate for their situations. This could be especially problematic for retirees who depend in part on interest income. And while moderately higher inflation may not be a big strain for workers as long as income keeps pace with prices, higher inflation can cut into the purchasing power of retirement savings.

It’s unlikely that the FOMC will let inflation get out of control, but it’s also unlikely that interest rates will rise significantly in the absence of strong inflationary pressure. You may want to revisit your debt management and retirement income strategies in light of the expectation for a prolonged period of low interest rates.

The principal value of fixed-income investments may fluctuate with market conditions; if redeemed prior to maturity, they may be worth more or less than their original cost.

Information provided has been prepared from Broadridge Advisor Solutions sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Broadridge Advisor Solutions is not an affiliate of Equitable Advisors, LLC. Please consult your tax and legal advisors regarding your particular circumstances. Neither Equitable Advisors nor any of the data provided by Equitable Advisors or its content providers, such as Broadridge Advisor Solutions, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the Equitable Advisors website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

Securities offered through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through Equitable Network, LLC and its subsidiaries.

Securities offered through Equitable Advisors, LLC (NY,NY 212-314-4600), member FINRA/SIPC (Equitable Financial Advisors in MI & TN). Investment advisory products and services offered through Equitable Advisors, LLC, an SEC registered investment advisor.

Annuity and insurance products offered through Equitable Network, LLC, which conducts business in CA as Equitable Network Insurance Agency of California, LLC, in UT as Equitable Network Insurance Agency of Utah, LLC, and in PR as Equitable Network of Puerto Rico, Inc. Equitable Advisors and its affiliates do not provide tax or legal advice. Please consult your tax and legal advisors regarding your particular circumstances. Individuals may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. The information in this web site is not investment or securities advice and does not constitute an offer.

Price Financial Services is not a registered investment advisor and is not owned or operated by Equitable Advisors or Equitable Network.

For more information about Equitable Advisors, LLC you may visit equitable.com/crs to review the firm’s Relationship Summary for Retail Investors and General Conflicts of Interest Disclosure. Equitable Advisors and Equitable Network are brand names for Equitable Advisors, LLC and Equitable Network, LLC, respectively.

Link to equitable.com

Privacy Policy

Check the background of this financial professional on FINRA's BrokerCheck
Check the background of this financial professional on FINRA's BrokerCheck