Wednesday, July 8, 2020
July 8, 2020

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Personal Finance: We’ve hit zero percent interest rates

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The Federal Reserve on Sunday evening cut short-term interest rates — to zero.

That’s not a typo: The Fed’s cut drops rates again down to a range of 0.0 percent to 0.25 percent, a decrease of 0.50 percent from current levels. That means you can borrow $100 paying interest annually of about 25 cents.

“The probability is good that the Fed will again cut rates to that level” at its next meeting this week, said Lyn Alden Schwartz, who runs an investment research firm in Absecon, N.J.. “That puts pressure on regional banks, which rely on the spread to make money,” borrowing at a lower rate from the central bank, and lending at a higher rate.

Although zero- or close-to-zero percent interest rates became the norm after the Great Financial Crisis, America today is still technically in an economic expansion.

Janney’s chief fixed income strategist Guy LeBas said financial market disruption prompted the cut.

“It should reduce the cost of borrowing for corporations and individuals and provide stimulus,” said LeBas, who’s also director of fixed income solutions for Janney Capital Management.

Will it hurt savers? Yes. Could it hurt smaller community banks? Definitely. They make money by borrowing at a low rate and then lending at a higher rate.

“For smaller banks, zero interest rates are a challenge. They don’t have the same power to make large loans” like larger banks, LeBas said.

However, LeBas said, the point of the expected cut to zero is to soothe investors in the crisis: “Right now, the power of financial market dislocations is more significant than the level of interest rates.”

Among fixed income, he noted, “municipal bonds are surprisingly cheap. There’s a lack of buyers out there. So there are some appealing opportunities if you can hold your nose.” He pointed to the muni bonds issued by major cities, which have sold off and are posting higher yields than a week ago.

Local Philadelphia-area bankers such as Mike Keim, president of Univest Bank & Trust in Souderton, said “the Fed can’t cure a virus and can’t change issues in supply chains. But I’m sure the Fed will take steps so that markets function. The Fed is doing everything they can to provide liquidity.”

Univest, a regional bank, operates 39 branches around Greater Philadelphia and New Jersey, 13 of them in Montgomery County, where the headquarters are located.

“We’re staying open and serving customers through drive-through centers only. Safe deposit box visits in person we do by appointment,” Keim said.

Nationally, some banks and credit card companies such as Citi are offering coronavirus relief measure, according to the bank’s website.

Effective Monday, March 9, 2020 for an initial thirty days, Citi may offer assistance to:

• Retail bank customers: Fee waivers on monthly service fees; waived penalties for early CD withdrawal.

• Retail bank small business customers: Fee waivers on monthly service fees and remote deposit capture; waived penalties for early CD withdrawal; Bankers available after hours and on weekends for support.

Student loan interest waived

President Donald Trump declared a national emergency to combat the coronavirus Friday afternoon, unleashing $50 billion of federal funding to take on the crisis, cutting rules to enable hospitals to expand their capacity to treat people and promising an expansion of testing as soon as next week.

He said his administration was working with drug companies and retailers to develop drive-through testing locations, with Google developing a web site to help people find places to get tested. He also waived interest on federal student loans temporarily, although not payments on principal and not private loans.

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