mortgage

Federal Reserve likely to stay on low-rate path

Greg McBride
Highlights
  • Federal Reserve unlikely to hike rates unless economy improves.
  • Fed probably will focus on preventing onset of deflation.
  • Now is the time for consumers to pay down debt, refinance.

The Federal Reserve's Federal Open Market Committee, or FOMC, is meeting this week in a two-day session scheduled to conclude with an announcement today at 2:15 p.m. Eastern.

What will the Fed discuss behind closed doors? Not interest rates, ironically, or at least not much. There just isn't much to discuss on that front.

More Federal Reserve coverage
For more analysis of the Federal Reserve's latest rate decision, visit Bankrate's Federal Reserve News page.

Instead, the FOMC's time will be occupied discussing more pressing matters such as Europe's debt woes, the anemic U.S. job market and a still-weak housing market. The committee will also probably do some scenario planning regarding the possibility of deflation.

Will the Federal Reserve raise interest rates before year-end? Not unless we see a big jump in private sector job growth, an easing in global financial tensions and a surge in inflation. In other words, probably not.

Deflation worries

Even with financial tensions easing, as evidenced by Libor stabilizing since the beginning of June, inflation has been running so low in recent months that the Fed will focus more on preventing an onset of deflation.

This means benchmark interest rates aren't going anywhere. While the Fed may discuss downsizing its balance sheet, it won't act on it anytime soon.

How should consumers respond to an environment of prolonged low interest rates? Paying down debt is a good start. And nevermind what we hear about consumers doing just that, as the declining debt burden has come overwhelmingly from lenders writing off bad debt.

The Federal Reserve's G.19 Consumer Credit statistical release shows a decline in revolving debt -- primarily credit card debt -- of $129 billion since September 2008. But credit card chargeoffs represent more than $120 billion of that.

Refinance opportunity

The outstanding mortgage balances on one- to four-family residences has been down every quarter since early 2008. In the context of distressed sales -- where foreclosures and short sales involve lenders receiving much less than owed -- that decline is not surprising.

But let's not kid ourselves into thinking the decline is driven by homeowners around the country writing sizable checks to pay down or pay off mortgage balances.

Debt burdens have come down, but any evidence that consumers are the ones paying debt down is pretty scarce. A prolonged low-rate environment acts as a tailwind for those borrowers looking to pay down variable rate debts, such as credit cards and home equity lines of credit.

With mortgage rates hovering at record low levels, the window of opportunity remains open to refinance and lock in low fixed rates, especially for homeowners with adjustable-rate mortgages bound to reset higher over the next few years.

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