If you've been holding off on buying a new car or refinancing
your mortgage, don't worry. You've still got plenty of time to lock
in today's record low rates. The Federal Reserve announced Thursday
that it will continue to leave the federal funds rate target at
rock bottom -- and it's unlikely to raise the federal funds rate
"Information received since the Federal Open Market Committee
met in August suggests that economic activity has continued to
expand at a moderate pace in recent months. Growth in employment
has been slow, and the unemployment rate remains elevated," said
the Fed in a post-meeting statement. "Household spending has
continued to advance, but growth in business fixed investment
appears to have slowed. The housing sector has shown some further
signs of improvement, albeit from a depressed level. Inflation has
been subdued, although the prices of some key commodities have
increased recently. Longer-term inflation expectations have
As a result of the weak economic data and the stable outlook for
inflation, members of the Federal Reserve Open Market Committee
voted to keep the federal funds rate target -- which helps set the
interest rate at which banks trade balances held at the Federal
Reserve -- at 0 percent to 0.25 percent.
In addition, committee members decided to extend the date at
which they expect to raise the federal funds rate target from late
2014 to mid-2015. That move was part of a broader economy-boosting
action that included buying monthly rounds of mortgage-backed
securities at a rate of $40 billion per month until the labor
market substantially improves.
"The Committee is concerned that, without further policy
accommodation, economic growth might not be strong enough to
generate sustained improvement in labor market conditions," said
The Fed's decision to keep rates low for a few more years is
good news for high-interest borrowers, such as credit card holders,
who are continuing to pay down their existing balances. That's
because most credit cards in the United States, as well as other
types of variable rate loans such as mortgages and auto loans, are
tied to the prime rate, which is typically 3 percentage points
above the federal funds rate.
When the federal funds rate target is raised or lowered by the
Federal Reserve, the prime rate moves as well. When that happens,
borrowers' interest rates immediately go up or down in tandem with
the prime rate.
Rates to remain low until at least 2015
The Fed hopes that by keeping the federal funds rate target near
zero for several more years, lenders that tie their loans to the
prime rate will keep the interest rates they charge new borrowers
attractively low as well, says Ann Owen, a professor of economics
at Hamilton College.
For example, the thinking goes, if you're a lender who is
considering approving a customer for a long-term loan, "you're
going to be comfortable charging a lower interest rate because you
believe that interest rates won't rise over a longer period of
time," says Owen.
Consumers, in turn, are more likely to borrow at lower rates.
"The argument for the lower interest rates is that it does pull
down borrowing costs for anybody out there who has a loan based on
short-term interest rates," says David Ely, a professor of finance
at San Diego State University. "So, at least indirectly, it should
boost the economy," he says, because it encourages people to spend
when credit is relatively cheap.
The problem, however, is that consumers and businesses don't yet
have the appetite to borrow huge amounts, say experts. "They're not
trying to borrow more; they're trying to borrow less," says Jim
Johannes, director of the Puelicher Center for Banking Education at
the University of Wisconsin.
"There's a lack of demand that's driving this," adds San Diego
State University's David Ely. If you ask banks, "they would say
that loan demand is quite low right now, and they don't see a
turnaround of that in a dramatic way," he says.
Consumers, especially, have been steadily paying down their debt
loads since the Great Recession and although they've increased the
amount they borrow somewhat in the past year, they haven't shown
any signs that they're ready to borrow as much as the economy needs
to spark a robust recovery.
"A lot of consumers are deleveraging right now," says Johannes.
The lower rates are helping them to deleverage faster by allowing
them to refinance some of their loans, such as their mortgages, he
says. However, the cheap access to credit isn't spurring consumers
to spend the way the Fed hoped it would.
Businesses, in turn, are sitting on their profits, rather than
investing money in new supplies or new workers, say experts,
because they don't have a steady enough customer base to justify
the extra expense. "If you talk to businesses, they don't say we
don't have enough credit. The problem is we don't have enough
customers," says Rebel Cole, a professor of finance at DePaul
"There's a general paralysis that the Fed is fighting," adds
Johannes. "People and businesses, they're just saying, 'I don't
know what's going to happen and so what I'm going to do is I'm
going to try to preserve the capital I have now.'"
Since January 2012, revolving debt, which is mostly made up of
credit card debt, has fallen five months out of seven, according
to research from the Federal Reserve. Total consumer credit,
meanwhile, fell in July for the first time in 11 months.
Economists say that the drop in debt is a strong sign that
consumers and businesses just aren't ready yet to spend more than
they can afford to quickly repay -- and that's dragging down the
"If the economy is going to recover, consumer spending is going
to be an important factor and although it's growing, it's not
growing as fast as it needs to really support a robust recovery,"
says Hamilton College's Ann Owen.
That, in turn, is partially why the Federal Reserve has decided
to extend the amount of time it plans to keep the federal funds
rate target at rock bottom. It's all about expectations, says
By extending the forecast, the Fed is sending a signal to
consumers and investors that short-term interest rates will remain
low for a while, so if they're thinking about investing in a new
car or in additional personnel for their small business, they still
have time to do it.
"The Fed is signaling to people that we're not done yet," says
Owen. "That could have an effect on confidence, which could have a
bigger impact on the economy than any small change in interest
A difficult task
Many economists, however, are doubtful that the Fed's efforts will
have much of an effect. "In general, the Fed is very good under
normal conditions at handling cyclical fluctuations in the
economy," says the University of Wisconsin's Jim Johannes. However,
the problems with the economy today are largely structural, he
says, and there's nothing the Fed can do about them.
"The frustration with the Federal Reserve is they've done about
everything in their policy toolkit to fight the cyclical factors,"
says Johannes. However, "the Fed is not equipped to fight
structural issues," such as state and federal budget deficits.
That said, "monetary policy is the only game in town," says San
Diego State University's Ely. The U.S. government is extremely
unlikely to invest federal funds into stimulating the economy and
so the Fed is trying to do what it can and show that it's not just
sitting on its hands.