Fed: No rate changes on the horizon until 2015
If you're still several months away from being able to afford a down payment on a house or replace your aging car, relax. You've still got more than two years to take advantage of today's record-low interest rates.
The Federal Reserve announced Wednesday that it will continue to keep the federal funds rate target near zero -- and it plans to leave the federal funds rate alone until at least mid-2015.
"Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months," said the Fed in a post-meeting statement. "Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level."
As a result of the weak economic data, the Federal Open Market Committee (FOMC) voted to leave the federal funds rate target -- which helps determine the interest rate at which banks trade balances held at the Federal Reserve (thus influencing other interest rates) -- at 0 percent to 0.25 percent.
The record low rates are intended to help spur borrowing and encourage businesses and consumers to spend. For example, the Fed hopes that consumers will use today's historically low rates to refinance an existing mortgage or buy a new house or car, despite the economic uncertainty that's clouding their ability to plan ahead.
"Buying a home impacts consumer spending drastically," explains David Nice, an associate economist with Mesirow Financial. When you buy a new house "you have to furnish it. You might have to put a new roof on it." Refinancing an existing mortgage can also help boost the economy by reducing the amount you pay on your mortgage each month, giving you more money to spend elsewhere, he says.
The low rates are also designed to help consumers dig their way out of debt faster and pay down the high-interest loans that are squeezing their ability to spend their income on something besides interest payments, say experts.
For example, credit card holders, in particular, are paying much less to carry a balance from month to month, thanks to the Fed's efforts to keep the federal funds rate target near zero. That's because most credit cards are tied to the prime rate, which is typically 3 percentage points above the federal funds rate. When the federal funds rate target is revised by the Fed, cardholders' APRs usually move up or down as well.
Data shows the Fed's efforts have helped to some extent, say experts. For example, "it does look like there is a pickup in housing," says James Butkiewicz, a professor of economics at the University of Delaware. "So those low rates in that sector are helping."
However, businesses aren't hiring at the rate the economy needs to flourish, and are unlikely to do so until they have a better idea of what type of environment they will be operating under. "What you constantly hear about, which is very hard to measure, is the uncertainty," says Butkiewicz.
Financial uncertainty is affecting businesses and consumers alike these days, which is "why businesses are reluctant to make any commitments," he says.
That's especially true right before the U.S. presidential and congressional elections, which are set for Nov. 6. Fiscal policy could change dramatically going forward, depending on the election's outcome. Sharp decreases in government spending and tax increases for everyone could also rock the economy in 2013 if U.S. leaders fail to come to an agreement in time to stop the scheduled changes known colloquially as "the fiscal cliff."
Those uncertainties alone are enough to give people pause about risking what they have on additional debt, say experts, even if rates are historically low. "There's a lot of uncertainty on the fiscal side that the Fed doesn't have much control over," says Mesirow Financial's David Nice.
Things may improve after the election, once people know what direction U.S. policy is likely to take going forward, says Butkiewicz. "There will be a little more clarity," he says. "I think once the election's over, people will say, now, at least we know where we're likely to be headed for the next four years and then they can start making plans." That may eventually lead to more confident borrowing.
It's too soon to tell, however, whether the Fed's more aggressive policies, such as its recent decision to buy $40 billion worth of mortgage-backed securities each month, are working, say experts. "The housing sector has picked up," says Butkiewicz. But, "it's not going to react immediately to lower mortgage rates. People have to plan. I know people right now who are reluctant to sell until after the first of the year," he says, due to the upcoming holidays. "There's timing issues as well. I think we need to give them a chance and longer time before we can evaluate them," he says.See related: Bankruptcies fall again in third quarter of 2012
- Credit freezes are now free – but do you need one? – Credit freezes, which keep lenders and other companies from viewing your credit, are now free. We compared them to other credit protection tools, including locks and monitoring services. Here's how to use them all to protect yourself ...
- Employer credit checks: Who does them, how they work and what laws apply – If you're applying for a new job, a credit check could determine your fate, depending on the position and where it's based. Here's how they work and what to expect ...
- My card issuer of 25 years suddenly wants to know more about me – Under the Patriot Act, banks are required to verify the identities of their customers and maintain accurate information on them. But my bank's demand to know how I earn my income is an invasion of my privacy ...