How the Fed's Moves Affect You
It’s pumping trillions of dollars into the economy and keeping rates near zero. Savers are sunk, but borrowers get a boost.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

Not all that long ago, the only major decision the Federal Reserve Board had to make was where to set short-term interest rates. But in the past decade, the Fed has become increasingly aggressive in its efforts to pump up the economy—and there’s no sign it will slow down anytime soon. Whether you’re a borrower, saver or investor, this matters to you.
Some history: As the economy cratered in 2008, the Fed made the unprecedented move of purchasing large sums of Treasury bonds and mortgage-backed securities, which pumped an extra $1 trillion into the economy. Over the course of the next 10 years, it purchased an additional $2.5 trillion. Then, when the coronavirus crisis hit, the Fed purchased another $3 trillion in bonds and securities, bringing its liabilities so far to a record $7.2 trillion. (The total size of the U.S. economy is currently $21.5 trillion.)
And the Fed isn’t done. It now has the authority to support up to $2.6 trillion in new lending, which includes making loans to businesses through its Main Street Lending Facility and lending to city, county and state governments through its Municipal Liquidity Facility. The Fed is also backing loans issued through the Paycheck Protection Program, a federal loan-forgiveness program designed to help small businesses survive the coronavirus pandemic.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
As for interest rates, it’s likely they will remain low for a very long time in order to encourage borrowing and keep the money flowing. Fed chairman Jerome Powell announced at the June 10 meeting of the Federal Open Market Committee that the coronavirus could continue to have an impact on the economy for the next two years and that the Fed isn’t likely to raise interest rates until 2023 at the earliest. If inflation remains contained, rates could stay low for even longer. However, although the European Central Bank has experimented with negative interest rates by allowing commercial banks to borrow at negative 1%, the Fed isn’t inclined to go that far.
Good news, bad news. Borrowers will benefit from the low-rate environment. The 30-year fixed mortgage rate is likely to remain below 4% for the foreseeable future (although home prices typically rise faster when rates are low). Auto, home-equity and other consumer loan rates will also likely remain at historic lows.
The news is not good, though, for savers and income investors. Bank deposits, certificates of deposit and short-term U.S. government securities will pay almost nothing. Returns for longer-term government and corporate bonds will also be much lower than historical norms. Annuities and life insurance premiums will cost more, because the insurance companies that back those products are earning less in the fixed-income markets where they invest those proceeds.
The stock market has typically celebrated low interest rates, but low rates are a mixed blessing for investors in general. The stock market is now the only game in town for those looking for decent returns on their retirement savings. But without a bond market that provides a reasonable rate of return, it will be more difficult for investors to protect themselves from market downturns by investing in a mix of stocks and bonds. Investors seeking higher returns may be driven into much riskier investments, such as high-yield junk bonds, commodities and private equity.
Consider investing in high-quality dividend-paying stocks, which may yield more than fixed-income investments while providing some ballast in down markets.
The Fed's money machine
Unlike the rest of us, the Fed doesn’t have a budget constraint. It can buy assets by writing checks on itself. Because the Fed doesn’t ever have to pay off its liabilities, it can never go bankrupt.
So what’s to prevent the Fed from creating as much money as it wants? Again, nothing. The only problem with creating money is that it might cause inflation, as more paper and electronic dollars chase a slowly growing supply of goods and services. This is what has caused hyperinflation in smaller countries in the past.
But so far, that hasn’t been a problem. In the past decade, no matter how many securities the Fed has purchased, inflation has remained stubbornly low, breaching 2% only when oil price run-ups occurred. The mechanisms that drove inflation in past decades don’t seem to be working the same way anymore, and for that reason it appears that inflation is going to remain low for some time to come.
-
-
Stock Market Today: Tech, Bank Stocks Lead Markets Higher
Retailers were big gainers, too, thanks to strong earnings from Lululemon Athletica.
By Karee Venema • Published
-
IRS: Don't Trust All Social Media Tax Advice
The IRS warns that not all social media tax advice should be trusted.
By Kelley R. Taylor • Published
-
Kiplinger's Retail Outlook: Consumers Are Still Resilient
Economic Forecasts Kiplinger's Retail Outlook: Sales this year are likely to be mostly stable, even as the economy slows.
By David Payne • Last updated
-
Kiplinger Jobs Outlook: Finally, Signs of a Slowdown
Economic Forecasts The February jobs report signals a change in direction, but it may take time to arrive.
By David Payne • Last updated
-
Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
Economic Forecasts Kiplinger’s Interest Rates Outlook: Rates Likely to Rise Again After Banking Crisis is Over
By David Payne • Last updated
-
Kiplinger Housing Outlook: Housing Starts Continue to Fall
Economic Forecasts Kiplinger Housing Outlook: Weakness lies ahead for the housing market as high prices, mortgage rates ding affordability.
By Rodrigo Sermeño • Last updated
-
The Most Expensive Natural Disasters in U.S. History
Economic Forecasts Wind, water, fire and drought have all wreaked havoc on the United States. What’s been the worst?
By David Muhlbaum • Last updated
-
PODCAST: Is a Recession Coming?
Smart Buying With a lot of recession talk out there, we might just talk ourselves into one. We take that risk with Jim Patterson of The Kiplinger Letter. Also, dollar stores: deal or no deal?
By David Muhlbaum • Published
-
Stick With Your Plan
Financial Planning Timing the market is nearly impossible. The worst thing you can do is sell stocks when prices are tumbling.
By Mark Solheim • Published
-
There's No Vaccine Against Inflation
Economic Forecasts Prices should ease in 2022, but inflation will remain above the levels of recent years.
By Sandra Block • Published