Federal Reserve Board officials stuck to their “steady as she goes” approach today, choosing to leave unchanged the two interest rates they control directly. As a result, rates on consumer loans, certificates of deposit and mortgages should stay relatively stable for the rest of the summer.

The decision comes after the latest gathering of members of the Fed’s policy-setting group, the
Federal Open Market Committee. They left the federal funds rate at 6.5 percent and the less-important discount rate at 6 percent.

Because the two rates guide market rates such as those charged on home equity lines of credit and auto loans, borrowing shouldn’t get much more expensive for now. At the same time, officials warned in their post-meeting statement that they still lean toward raising rates in the future. That will keep borrowing from getting much cheaper either.

“Recent data have indicated that the expansion of aggregate demand is moderating toward a pace closer to the rate of growth of the economy’s potential to produce. The data also have indicated that more rapid advances in productivity have been raising that potential growth rate as well as containing costs and holding down underlying price pressures,” the statement said.

“Nonetheless, the Committee remains concerned about the risk of a continuing gap between the growth of demand and potential supply at a time when the utilization of the pool of available workers remains at an unusually high level.”


Slowing down, cooling off
Analysts almost universally expected the Fed to stay on the sidelines this time around because its six previous rate hikes seem to be slowing the economy. Those increases, which pushed the funds rate up from 4.75 percent last spring, culminated in a 50-basis point, or one-half of a percentage point, hike in May.

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.

What you can do
Whether the Fed raises rates again in the fall remains to be seen, but many experts don’t think they will. Most consumer rates will flatten out under that scenario, giving 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 what 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 if those market players worry more than expected about the tone of the Fed’s post-meeting statement, rates could climb a bit higher.

As for savers, their yields closely track actual Fed moves (see
chart). If the Fed remains inclined to raise rates but doesn’t, yields aren’t going to go any higher. Some economists think officials may even start cutting interest rates by later next year. That means there’s little benefit and a lot of risk in waiting to lock in a high-yield CD.

Consumers interested in seeing how all of this plays out should keep watching interest rates for the next several months. The next Fed meetings are scheduled for Oct. 3, Nov. 15 and Dec. 19.