Consumers who are apprehensive about today’s
Federal Reserve Board meeting shouldn’t let their blood pressure get out of control — the gathering likely will be much ado about nothing. In fact, some think the Fed has finished hiking interest rates for good.
While that’s decent news for borrowers, people shouldn’t let irrational exuberance get the better of them. Interest rates on loans probably won’t get cheaper anytime soon and income growth could slow with the economy, so people might want to think twice about taking on excessive debt the next few months.
“I’m firmly in the fold with the other analysts in expecting the Fed to remain on the sidelines here. All the data, all the hard evidence is in, and it is supportive of the view that inflation remains rather tame other than energy prices,” says Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. “In terms of the real economy, there was concern the economy was growing at an unsustainably high rate. But there too the evidence is suggesting that a period of cooler economic growth is in progress.”
As for whether the rate-hiking cycle is over, he adds, “Yeah, it could very well be.”
Beginning last June, members of the Fed’s policy-setting group raised the primary interest rate they control six times. As a result of the
Federal Open Market Committee‘s moves, the federal funds rate sits at 6.5 percent now, up from 4.75 percent last spring. That rate guides market rates such as those charged on home equity lines of credit and auto loans, so borrowers have seen their debt service costs rise.
But after jacking rates up by 50 basis points, or one-half of a percentage point, in mid-May, the FOMC left rates alone during its next meeting at the end of June amid signs of an economic slowdown. Since further slowdown evidence has emerged in the meantime, it looks like the Fed’s hands-off approach could carry the day not only Aug. 22 but for the remainder of the year.
Consumer spending on homes and other goods has cooled, for instance, because the cost of borrowing has risen. Fed rate hikes drove 30-year fixed mortgage rates to 8.57 percent this May from 7.15 percent in May 1999, while sending average platinum credit card variable rates to 16.31 percent from 15.07 percent and used car loan rates to 10.39 percent from 9.88 percent, according to Bankrate.com data. Most major stock indexes are either flat or slightly down in 2000 as a result of the rate increases, too.
Businesses have taken a breather as well. Manufacturing activity has declined a bit and layoffs in sectors of the economy such as mortgage lending and Internet retailing and content production have increased.
If the Fed leaves rates alone through the beginning of 2001, most consumer loan and deposit rates will flatten out. That gives consumers little incentive to either wait to borrow or lock in a loan rate as quickly as possible.
The two exceptions apply to consumers looking to take out long-term, fixed-rate mortgages and savers looking for high-yielding certificates of deposit. They may want to go ahead and lock in at today’s rates.
Consider that long-term mortgage rates rise and fall based on whether market watchers expect the Fed to do in the future. Right now, the Fed looks like it will sit on its hands for several months. As a result, market participants have driven mortgage rates to their lowest levels in 2000. But Fed officials will probably release a statement after their meeting that says they are still concerned about inflation rather than taking a neutral view toward it. That means rates won’t go much lower and could even climb back up a bit.
“I’d probably give a modest edge for there to continue being a bias toward higher rates,” Mayland says. “They’re on the sidelines, but still inflation is more of a risk.”
As for savers, their yields closely track actual Fed moves (see
chart). If the Fed is inclined to raise rates but doesn’t, yields aren’t going to go any higher. Economists such as Mayland predict officials may even start cutting interest rates later next year. That means there’s little benefit in waiting to lock in a high-yield CD and a lot of risk.
Consumers interested in seeing how this all plays out should tune in Tuesday. After that, the next FOMC meetings are scheduled for Oct. 3, Nov. 15 and Dec. 19.