Consumers who are apprehensive about the upcoming
Federal Reserve Board meeting on Tuesday, Oct. 3, 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’s recent series of rate hikes has run its course.
While that’s decent news for borrowers, people shouldn’t let irrational exuberance get the better of them. 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.
Beginning in June of 1999, 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 in the spring of 1999. 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 most recent meetings at the end of June and August 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 Tuesday 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 7.97 percent in August from 7.15 percent in May 1999, while sending average fixed-rate credit cards to 15.8 percent from 13.19 percent and 48-month new car loan rates to 9.73 percent from 8.66 percent in the same time span, according to Bankrate.com data. Most major stock indexes have moved very little 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 to 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. Mortgage shoppers might benefit by waiting to lock in because rates could decline as the market starts anticipating Fed rate cuts later next year. Savers, on the other hand, probably won’t see yields this high for a long while and should consider locking in now.
Consumers interested in seeing how this all plays out should tune in Tuesday. After that, the next FOMC meetings are scheduled for Nov. 15 and Dec. 19.
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