Interest Rates are what some might call a double-edged sword. When they’re low, it’s great for borrowers because they don’t pay as much money to the bank when they borrow money. However, those low interest rates aren’t so great for savers as they tend to earn less on the money they have sitting in the bank.
When the Fed lowers rates, they’re doing this to provide a boost to the economy – to get people and businesses to spend (borrow) more money for things like real estate, cars, construction, etc. Conversely, when the Fed increases rates, they’re doing this because they believe the GDP (Gross Domestic Product) to be strong which could increase inflation, so they want to constrict growth (GDP) by increasing the discount rate – pushing up rates you pay for loans as well as what the bank pays for your deposits, as a result discouraging borrowing and encouraging savings by keeping inflation in check.
So, what does all this mean for the consumer or business borrower/saver? It comes down to awareness. When you’re debating setting aside funds in a money market account vs. taking out a loan to purchase a new piece of equipment for your business, think about how that money is going to work best for you. Will you earn a lot of interest by not touching the money and leaving it in the money market account? Or would now be the best time to make that needed purchase – piece of equipment, new building, vehicle – as you’ll owe less money on your loan while contributing to your company’s growth and development?
In its September 2019 meeting, as expected, the Fed has lowered the discount rate by .25%, which means that the interest rate for loans and deposits is also going down. As a business owner, this is a great time to leverage your funds so that more of your money is going back into your pocket instead of the bank’s, giving you more buying power. It doesn’t mean you can’t open that commercial savings account, it just means you’ll want to do it strategically. Make your money work as hard as it can for you.
It’s important to have a financial partner who has your business needs top-of-mind and who can provide guidance on options based on the current market situation. At Central Bank & Trust we aren’t just “the bank” to our clients, we are partners in business, helping to ensure our clients’ money is working hard for them. Does your bank do that for you?