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What Happens After a Fed Rate Cut

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The Federal Reserve has reduced interest rates once again, and you’re probably wondering what this means for your money. The Federal Open Market Committee (FOMC) cut the federal funds rate in July for the first time since December 2008, then cut again at the September meeting.

In September 2007, the Fed dropped the fed funds target range from 5.25% to 4.75%, then slashed rates nine more times over the course of 15 months, finally ending in December 2008 by reducing fed funds to a historically low range of 0% to 0.25%. It left rates unchanged for seven years, until a small hike to 0.25% to 0.50% in December 2015. This kicked off a string of rate hikes that ended last December, when the FOMC raised the federal funds rate to 2.25% to 2.50%.

At the September 2019 meeting, the federal funds rate was reduced by 25 basis points to 1.75% to 2.00%. Read on to understand how these rate reductions could impact you.

What is the federal funds rate?

The federal funds rate is the Federal Reserve’s main tool for managing interest rates in the United States. Fed funds is the main benchmark for the interest rates on every financial product on the market, including savings accounts, personal loans, mortgages and credit cards.

To put it more precisely, the federal funds rate is the narrow range of interest rates at which banks and credit unions trade federal funds — the balances they hold at Federal Reserve Banks — with each other overnight. The effective federal funds rate is the weighted average of the rates that banks negotiate with each other. Financial institutions use the effective federal funds rate as the benchmark for setting interest rates on all of their other lending and deposit products.

When the federal funds rate goes up, interest rates on financial products also go up. So when the federal funds rate is high, savers rejoice because it means better returns on their deposit accounts. But it also means it’s more expensive for consumers and businesses to borrow money, putting downward pressure on economic activity and inflation, the Fed’s main enemy. It also makes it harder for borrowers to get loans when APRs are higher.

And when the federal funds rate goes down, institutions lower their rates, enabling consumers and businesses to borrow more money at lower rates, thereby driving more economic activity. On the other hand, those looking for the best savings rates, including the best rates on certificates of deposit (CDs), will be disappointed as deposit account rates fall.

What happens after a Fed rate cut?

A Fed rate cut causes a downward shift in deposit account rates. We’ve already been experiencing industry-wide interest rate cuts on savings and other deposit account types in the wake of the July rate reduction.

“When the Fed cuts rates, you’ll see many online banks react within a few weeks,” said Ken Tumin, founder of DepositAccounts.com, also LendingTree-owned. “Reductions in average online savings account rates usually follow close on the heels of a Fed rate cut, within a month or two.”

As for brick-and-mortar bank rates, they’ll also see small drops, but since their rates are already so low, their bottom line will hardly be affected.

How a Fed rate cut affects certificates of deposit (CDs)

Looking at historical CD rates confirms that we can expect deposit account interest rates to drop soon after a cut is announced. Tumin recalls that the rate cuts came quickly after the Fed cut rates in 2007. This was especially true for certificates of deposit, which tend to follow the federal funds rate rather closely. Back then, amid the financial crisis, rates followed until CD rates dropped below 2%, while savings accounts were earning less than 1%.

Below, you can see how closely the average 6-month CD rate followed the federal funds rate until the chaos of the financial crisis peak.

This time around, we’ll probably see more rate cuts like we’ve already been seeing for CDs. However, it’s more important to keep an eye on the Fed’s future outlook for the federal funds rate to determine where CD rates are going.

“If the Fed paints a deteriorating picture of the economy, that will increase the odds of several more rate cuts to come,” Tumin said. “That will put more downward pressure on CD rates, especially the longer-term ones like the 3-, 4- and 5-year CDs.”

How a Fed rate cut affects your credit card and mortgage

A Fed rate cut can help you pay off your credit card bills. Most major credit card issuers will lower their APRs accordingly within one or two billing cycles.

“It won’t move the needle much if [the Fed] only [cuts rates] once — since it’s only 0.25% — but any reduction is helpful when you have credit card debt,” said Matt Shulz, senior industry analyst at CompareCards, another LendingTree-owned site. Lowering your credit card’s variable rate means your credit card balances will accrue less in interest, possibly making it easier to pay down.

A lower federal funds rate will also affect adjustable-rate mortgages and HELOCs, as they’re based on short-term rates. “These should decline in tandem with the federal funds rate,” said Tendayi Kapfidze, lead economist at LendingTree.

Fixed-rate mortgages are less affected by the federal funds rate, instead tracking the 10-year Treasury rate. “A Fed funds cut will likely have little impact on fixed mortgage rates at this point,” Kapfidze said.

Why is the Fed cutting rates?

The Fed looks closely at several factors when considering whether to raise or cut the federal funds rate, including wages, employment, consumer spending and global markets. If the data points to a strong, growing economy, when employment is high and inflation is stable, the Fed may choose to raise the federal funds rate. Again, because that tightens access to money, it tends to slow down growth and prevent overheating. It also helps people save their money more efficiently in their savings accounts.

At the moment, however, we’re seeing the economy’s growth slowing down all on its own. Reports around jobs, spending and wages, paired with the current uncertainties surrounding global trade, have indicated to experts and undoubtedly, the Fed, that the economy is in need of a boost.

“A lower federal funds rate is seen as helpful to the future health of the economy,” Tumin said. A Fed rate cut, after months of weakening data, would hopefully breathe life back into the economy.

Note: This article includes links to DepositAccounts.com, which is also owned by LendingTree.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lauren Perez
Lauren Perez |

Lauren Perez is a writer at MagnifyMoney. You can email Lauren here

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Banking

How to Handle Financial Infidelity in Your Relationship

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

For relationship partners, dishonesty about spending and debt is known as financial infidelity. While partners may be uncomfortable talking about money, keeping secrets can be far more damaging to the relationship. Financial infidelity can lead to devastating scenarios and even bankruptcy, as well as relationship conflicts as severe as breakups and divorce.

A MagnifyMoney study found that 21% of divorced U.S. adults report that money issues ended their marriages, and overspending was the top issue among respondents. Financial infidelity adds another layer of damage because it constitutes a betrayal of trust.

“Financial infidelity does not give us trust and safety with our partner,” said Dr. Bonnie Eaker Weil, Ph.D., psychotherapist and author of “Financial Infidelity: 7 Steps to Conquering the #1 Relationship Wrecker.” “There’s no such thing as an okay financial fib. Any time you do a financial fib, that is a form of cheating.”

That being said, there are varying degrees of financial infidelity, and the intent is not always malicious. Here’s how to handle it in your own relationship.

Financial infidelity: How people lie about money

There are a number of ways that people can be dishonest about money with their partner. Here are some types of financial infidelity to watch out for.

Hiding large purchases

This occurs when one partner buys something out of the ordinary that is more expensive and exceeds any personal spending limits the couple has agreed upon. These purchases are usually eventually uncovered by the other partner, said Jennifer Dunkle, a financial therapist and licensed professional counselor.

Spending money on the kids

A 2018 study about financial infidelity published in the Journal of Financial Therapy found that one of the most common types of dishonest spending is money spent on the couple’s children without agreement or knowledge from the other parent, said Dr. Michelle Jeanfreau, Ph.D., associate professor, licensed marriage and family therapist and the author of the study. While this might seem relatively benign or well-intentioned, it’s still a form of dishonesty, and it warrants a closer look into your finances.

“If you aren’t talking about spending, then maybe that’s a sign that you need to be talking about spending,” said Jeanfreau.

Hiding accounts or restricting access to accounts

It’s okay to keep separate accounts from your partner as long as you are in agreement about spending limits, according to Justus Morgan, certified financial planner and vice president of Financial Service Group.

But if your partner has an account that you don’t know about or refuses to give you the password to oversee an account, that’s a form of financial infidelity. You and your partner are a team, so even if one of you is more comfortable managing your finances, you should both have access to all of your financial information.

Lying about prices or sales

Maybe your partner comes home with a new purchase, and instead of hiding it from you altogether, they lie about the price they paid. Or, perhaps they say they bought it on sale when they actually paid full price.

These are both common lies that emerged during the previously mentioned 2018 study. While it may not seem as malicious as hiding a purchase, lying about price still creates dishonesty in a relationship.

Why people lie about money

In the 2018 study, some participants identified acts of financial infidelity they’d committed but didn’t admit to having been financially unfaithful. Jeanfreau said that could be because they don’t realize that their small secret or lie is actually a form of financial infidelity that can be damaging to their relationship. Another possibility, she said, is that they don’t think there’s anything wrong with financial infidelity.

In a new study authored by Jeanfreau that is under review, researchers identified two common reasons why people commit financial infidelity. One motive for lying may be avoiding a money argument, while another reason is that people want to spend on themselves. Both motivations can indicate underlying problems with a relationship, Jeanfreau said. She also noted that some people may lie to minimize their own insecurities about spending or budgeting if they feel they don’t know how to self-spend within reason.

How to uncover financial infidelity in your relationship

So, how do you find out if your partner is keeping secrets from you? Morgan suggests looking at tax returns and credit reports together annually. It’s a healthy habit for any couple, and it should reveal missing income that was spent on a hidden purchase, as well as any credit card accounts opened without one partner’s knowledge.

If you’re concerned more immediately, you may want to ask your partner to review bank statements, credit card statements or other financial statements together. If your spouse isn’t willing to provide these statements, that should raise a red flag, said Morgan.

What causes financial infidelity?

The outcomes of financial infidelity can range from running up a credit card to bankruptcy to even divorce. So, you’ll want to know what aspects of a relationship can make financial infidelity more likely.

Eaker Weil said opposites attract to begin with, and a saver often attracts a spender and vice-versa; this can create a dynamic ripe for conflict, so understanding your differences is key. She also said that financial infidelity often arises from a lack of empathy or affection for one another: “We use money to hide when we can’t find our partner’s heart very often.”

Both Dunkle and Morgan pointed to a power imbalance as a factor that can increase the likelihood of dishonesty. When one of the spouses is more controlling about money decisions — especially if the spouse earns more and has the attitude that it’s their money — that can create an unhealthy dynamic, Morgan said.

Preventing financial infidelity

Morgan said one of the keys to establishing a healthy relationship around money is to recognize that everyone has different experiences when it comes to money, and that family upbringing often teaches us how to deal with money when we lack more formal instruction.

Eaker Weil even recommends that couples create a family tree with help from their parents and grandparents and share their findings with their partner. This should help to answer questions: how was money handled in each person’s background? Was there fear or deprivation around money? Did people put their family needs before their own? These questions can help predict people’s attitudes about money, an important topic of discussion among couples.

“If you’re able to really understand your own values and beliefs around money, then you’re going to be able to talk to your partner about goals and expectations for your finances,” said Jeanfreau.

She added that financial education should be a part of counseling for newer couples planning to join their finances. If couples learn early on how to communicate with transparency, find a system that works for them, develop a budget and plan and review their finances regularly, it can help prevent financial infidelity behaviors from the start.

Recovering from financial infidelity

Financial infidelity doesn’t have to be the end. But it should trigger a serious discussion, a review of your financial situation and possibly even help from professionals.

Eaker Weil recommends a weekly money talk for couples who have experienced financial infidelity. She said it’s important to approach these conversations with curiosity instead of being reactive, hurt or angry about your partner’s financial infidelity.

But sometimes, the way we talk about financial infidelity can actually make relationship problems worse. Dunkle said there are four destructive patterns in a relationship that need to be corrected when they occur: criticism, defensiveness, contempt and stonewalling.

Replacing those patterns by talking about your own feelings, describing the situation neutrally and describing what you want from your partner positively, rather than negatively, can help couples to move on from a financial infidelity incident. Dunkle also stressed the importance of attending couples therapy, since recovering from financial infidelity can be difficult to manage on your own.

Jeanfreau said the SAFE model is another way for couples to recover from financial infidelity. It’s a four-step process that involves the following:

  1. Speaking the truth, or coming clean about financial infidelity
  2. Agreeing to a plan, which involves setting up a budget
  3. Following that agreement and regularly reviewing it
  4. Having an emergency plan, which usually includes seeking the help of therapists or financial advisors

Don’t assume the worst of your partner. Find out what their intention was, and try to have empathy for their situation. And remember that it’s okay to ask for help. Financial infidelity happens to couples everywhere, and love for each other alone can’t prevent or repair it. It may take patience and a lot of work to get back on track, but financial infidelity doesn’t need to destroy your partnership.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Lindsay Frankel |

Lindsay Frankel is a writer at MagnifyMoney. You can email Lindsay here

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What Is a CD Loan?

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You’ve probably heard of certificates of deposit (CD) — but have you ever heard of a CD loan? While CDs are traditionally a savings tool, they can also be helpful when borrowing money. Some banks and credit unions allow you to borrow money against a CD that you already own, in the form of a secured loan.

“CD loans aren’t very common,” says Thomas Rindahl, financial advisor with TruWest Wealth Management Services in Phoenix. “In fact, when I talk to people, most don’t realize they are available. You’ll have to check with different financial institutions to see if they offer the service, but they can be useful for some people.”

CD loan: How does it work?

A CD loan is a loan that is secured with a certificate of deposit you already own. This type of loan allows you to borrow against the funds you have saved in a CD without having to pay early withdrawal penalties. You can use this type of loan for a variety of uses, such as debt consolidation, home improvement expenses, or medical bills.

The amount you can borrow will depend on the financial institution, but it can generally range from $500 up to $250,000. The amount you can borrow will vary. Some banks will allow you to borrow the full CD amount, while other banks cap CD loans at a percentage of the total amount in the CD. Some banks will only allow you to borrow against CDs that you have with their institution, and will not accept CDs issued by other banks as security.

These loans often have lower interest rates than those you’ll be charged with credit cards or unsecured loans. For example, at Wells Fargo the annual percentage rate (APR) for a CD-secured loan is fixed and ranges from 5.50% to 13.79%, while the APR for an unsecured personal loan ranges from 5.49% to 22.99%. CD-secured loans can also charge an origination fee.

Interest rates on CD loans tend to be lower than unsecured loans because you’re using your CD as collateral, meaning the bank can take the money in your CD if you were to default on the loan. In fact, even if you have a high debt-to-income ratio or a low credit score, you may still be approved for a CD loan.

“It’s relatively easy to qualify for a CD loan because it’s 100% secure as far as [the] financial institution is concerned,” says Rindahl. “This is a good type of loan if someone is looking to establish or reestablish credit. If the borrower makes the payment on time, they’ll have good credit reported to the credit agencies.”

Approval for the loan is often quick, with some financial institutions providing approval within hours and funding the same or next business day.

Pros and cons of CD loans

ProsCons
  • Lower interest rates than some other personal loans

  • Easier to qualify than an unsecured loan since you’re using your CD as collateral

  • Ability to build or rebuild credit history

  • Funds are made available to you relatively quickly

  • Installment payments can be budget friendly

  • CD-secured loans often have an origination fee

  • May not be the best option for someone with established credit

  • You put your savings at risk if you fail to pay back the CD loan

Should I get a CD loan?

If you currently have a CD and need quick cash, this type of loan can be a good option, since the application process is usually easy and the funds are often dispersed quickly. By taking out a CD loan, you can avoid having to pay a penalty for cashing in your CD before its maturity date.

These loans can also be a good choice for people who want to build their credit history or who need to rebuild their credit score after having trouble in the past. Qualifying for a CD loan is easier than qualifying for many other types of loans.

If your goal for the loan is to repair your credit history, make sure the financial institution submits your payment history to at least one of the three major credit reporting bureaus: Experian, Equifax and TransUnion. You will want to make your payments on time; if you don’t, missed payments could hurt your credit score.

Before you take out a CD loan, it can be helpful to explore whether cashing out your CD is the cheaper option. Since these loans include origination fees and interest, it might be more cost effective to cash in your CD, even if it incurs an early withdrawal penalty. The decision can depend on your CD interest rate.

For example, a 12-month $5,000 CD loan with a 5.5% APR and an origination fee of $75 would cost $225. Subtract the amount of interest you would earn from the CD during that year. If your CD has a 2.5% annual percentage yield (APY) and compounds monthly, you would realize earnings of $125 during that period of time, which means the net cost of the loan would be $100.

If you cashed out your CD instead of taking a secured loan against it, you would pay an early withdrawal penalty, which is often an amount of the interest earned. The average penalty for a 12-month CD is 120 days, or four months, of interest. If your CD pays 2.5% interest each year, you would forfeit $41.67. In this case, cashing out your CD may be the better choice.

Alternatives to CD loans

While a CD loan may be a good choice for some, there are other types of secured loans and lines of credit that help you with your money needs as well as help you build your credit.

  • Home equity line of credit (HELOC): If you are a homeowner, a HELOC may be a better vehicle. The line of credit uses your home equity as collateral. You can use as much or as little as you like, depending on your needs, which may be more convenient. Still, this could be risky, as you’d lose your home if you defaulted.
  • Secured credit card: If your goal is to build credit, a popular option is a secured credit card, offered by many financial institutions. You submit a deposit that becomes your credit limit and acts as collateral for the loan. “If you’re not using the line of credit, you have nothing to pay and it won’t infringe on your monthly cash flow,” adds Rindahl.
  • Savings-backed loans: You can also get a loan or line of credit that is backed by your savings account. If you don’t have a CD but do have a savings account, this may be an easier option. During the time of your loan, however, you will not be able to use the funds in your savings account.

The bottom line

While CD loans are a great option for certain customers, it’s important to understand the terms and fees that are attached. Also, be sure to weigh all of the options to find the best loan vehicle for your needs. Your banker can help by doing a quick comparison of all of your alternatives so you find the loan product that’s best for you.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here