Look closely and you can almost see the light at the end of the interest rate tunnel.

Federal Reserve Board officials left unchanged the two interest rates they control directly at their Nov. 15 meeting. They also kept in place their official position that inflation risks could accelerate. But in a statement issued after the gathering, they gave some hint that a shift toward a more friendly stance on rates might not be too far off.

“The utilization of the pool of available workers remains at an unusually high level, and the increase in energy prices, though having limited effect on core measures of prices to date, still harbors the possibility of raising inflation expectations,” said the statement from the Federal Open Market Committee, the Fed’s policy-setting arm. “The Committee, accordingly, continues to see a risk of heightened inflation pressures.

“However, softening in business and household demand and tightening conditions in financial markets over recent months suggest that the economy could expand for a time at a pace below the productivity-enhanced rate of growth of its potential to produce,” they added.

Rates steady — for now
As a result of the Fed’s latest decision, the
federal funds rate will remain at 6.5 percent and the
federal discount rate will stay at 6 percent. Those two rates help guide interest rates on consumer loans and savings products. They have held steady since May. FOMC policymakers also let stand their opinion that “the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future.”

That’s in part because the latest meeting came at a tough time for the Fed. Sales of cars and homes have been dropping because of declining consumer confidence and falling stock prices. But low unemployment and persistently high crude oil, heating oil and gasoline prices could still cause inflation to pick up. Most experts say the former concerns trump the latter. They say the next interest rate move will be a reduction. But they can’t seem to agree on the timing. That leaves consumers wondering whether to expect rate relief by Valentine’s Day, Easter, the Fourth of July or even next fall.

Yet the interest rate outlook is improving. The mere
expectation that rates will eventually come down is already causing market-sensitive rates to decline and that trend should continue. Thirty-year fixed mortgage rates — which topped out around 8.7 percent in May — fell below 8 percent in mid-August and haven’t breached that barrier since.

Financial moves to make now
Given these conditions, banking customers should consider altering their behavior. Savers may want to lock in certificate of deposit rates while they’re still high, for instance, while mortgage hunters might want to wait and see if home loan rates decline further over the holiday season. Car buyers should think about holding off so they can save on financing too. During extended periods of rate stability,
auto loans tend to get cheaper as lenders start undercutting each other.

Home equity borrowers, meanwhile, should strongly consider getting variable-rate lines of credit rather than fixed-rate loans right now. For one thing, many
home equity lines of credit start with lower rates than fixed-rate loans because they have “teaser” rates just like credit cards. For another, many HELOCs have non-teaser rates that are equal to, if not better, than the fixed rates available on home equity loans. Lastly, most HELOCs feature rates that change with
The Wall Street Journal Prime Rate. If officials cut the Fed funds rate, the prime rate will fall and so will the rates on most credit lines.

FOMC officials gather just one more time in 2000 — on Dec. 19. After that, they hold four meetings during the first half of 2001, one on Jan. 30 and 31, one on March 20, one on May 15 and one on June 26 and 27.

— Posted: Nov. 15, 2000