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Fed votes again to keep borrowing costs down

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Today's record-low interest rates aren't going anywhere anytime soon as the Federal Reserve announced Wednesday that it's not changing short-term borrowing rates now and confirmed it's unlikely to raise interest rates until at least late 2014.

"The economy has been expanding moderately this year," said the Fed in a post-meeting statement. "However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year."

Given that economic weakness, the Fed decided that it was best to leave short-term interest rates alone. 

"The economy continues to grow, but there seems to be some slowdown in the pace of growth," say Paul Edelstein, director of financial economics at IHS Global Insight. "Jobs are not growing as fast. Consumers seem to be pulling back in their spending." Exports have also slowed down, he says. "So there's a lot of risk out there."

Borrowing to remain affordable -- if you have a good credit score
As a result of Wednesday's meeting, consumers can expect that borrowing will remain cheap and available as long as you have good enough credit to qualify, says Michael Walden, a professor of economics at North Carolina State University.

That includes borrowing on credit cards. Since the Federal Reserve announced today that it would continue to keep the federal funds rate at rock bottom, that means credit card holders won't see a sudden interest rate hike on their cards any time soon.

Most credit cards are variable rate cards, meaning they are tied to the prime rate, which is typically 3 percentage points above the federal funds rate. When the federal funds rate is raised, the annual percentage rates (APRs) of variable rate cards immediately go up as well.

Members of the Federal Open Market Committee (FOMC) -- which sets monetary policy -- have voted to keep the federal funds rate at 0 percent to 0.25 percent for the past three-and-a-half years. They have declined to raise the rate until they feel the economy is significantly stronger.

The goal, Fed policymakers say, is to encourage consumers and businesses to borrow, despite the uncertain economy. However, the effectiveness of this strategy has received significant scrutiny.

The problem, says IHS Global Insight's Paul Edelstein, is that affordable credit with attractive terms continues to remain tough to get, particularly if you've got less than perfect credit.

"A lot of people are out of work," says Edelstein. Among those who are working, many of them have stagnant wages or have lower incomes than they did before the recession. That has made it tough for many people to pay their bills and so their credit scores have taken a significant hit in recent years.

Meanwhile, credit standards have eased somewhat since the depths of the recession, but banks are still picky about who they approve, says Edelstein. As a result, large swaths of the population are shut out from the cheapest rates.

"The Fed is going to do whatever it needs to do to keep interest rates low, and so this is as good a time as any to take out loans to access credit if you can, if you can get credit on favorable terms," says Edelstein.

However, until banks lower their credit standards, many people still won't be able to take advantage of today's historically low rates. 

In a press conference on Wednesday, Fed Chairman Ben Bernanke agreed that the limited availability of credit did mute the impact of ultra low interest rates at least somewhat. However, he said the policy of keeping rates low has still been successful. 

"Access to credit is a major issue. There's no question about it," said Bernanke. "Mortgage access is much tighter than it's been in a long time. Even credit card access is more restrictive than it has been in the past." However, he contended, "many Americans are able to take advantage of low interest rates."

Bernanke also pointed out that the policy has had much broader effects on the economy, such as encouraging businesses with cheaper access to credit to hire new employees.  

No QE3 for now
The Federal Reserve also considered a third round of stimulus known as quantitative easing, but decided to hold off until it saw more drastic signs that the economy is deteriorating.

"The Fed has already been very accommodative, by lowering interest rates to record lows and tripling the credit supply," says North Carolina State University's Michael Walden. "Some economists think any further Fed action will have little impact."    

During Wednesday's press conference, Chairman Bernanke addressed some of these concerns and answered critics who say the Fed has already used up the tools it has to bolster the economy. "Monetary policy by itself is not going to solve economic problems," he said. However, he added, "I do think that monetary policy still does have some capacity to strengthen the economy by easing financial conditions." 

Bernanke later added that the Fed is prepared to take additional steps to help stimulate the economy, but won't do so until it has a clearer picture of the economy's underlying strength. "We need to get further information about the state of the economy, where things are going," said Bernanke.  

'Operation Twist' continues
While leaving short-term rates alone, the Federal Reserve said Wednesday it will keep up one practice intended to tamp down the cost of mortgages and other long-term rates. The Fed will sell shorter-term Treasury bonds (which are low-interest loans to the federal government) and buy longer-term bonds. The practice, known as "Operation Twist," had been set to expire this month. However, the past few months of disappointing economic growth prompted policymakers to use one of the few tools left in their arsenal to try to help stimulate the flagging economy.   

"What the Fed has been doing has been buying long-term treasurys from the public," says IHS Global Insight's Paul Edelstein. "In doing so, by removing treasurys from the market, they're going to increase the price of these securities, which would lower the borrowing costs for consumers and businesses and homeowners." 

See related: Federal Agency opens credit card complaints to public

Published: June 20, 2012


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