Today's record-low interest rates aren't going anywhere anytime
soon as the Federal Reserve announced Wednesday that it's not
changing short-term borrowing rates now and confirmed it's unlikely
to raise interest rates until at least late 2014.
"The economy has been expanding moderately this year," said the
Fed in a post-meeting statement. "However, growth in employment has
slowed in recent months, and the unemployment rate remains
elevated. Business fixed investment has continued to advance.
Household spending appears to be rising at a somewhat slower pace
than earlier in the year."
Given that economic weakness, the Fed decided that it was best
to leave short-term interest rates alone.
"The economy continues to grow, but there seems to be some
slowdown in the pace of growth," say Paul Edelstein, director of
financial economics at IHS Global Insight. "Jobs are not growing as
fast. Consumers seem to be pulling back in their spending." Exports
have also slowed down, he says. "So there's a lot of risk out
there."
Borrowing to remain affordable -- if you have a good credit
score
As a result of Wednesday's meeting, consumers can expect that
borrowing will remain cheap and available as long as you have good
enough credit to qualify, says Michael Walden, a professor of
economics at North Carolina State University.
That includes borrowing on credit cards. Since the Federal
Reserve announced today that it would continue to keep the federal
funds rate at rock bottom, that means credit card holders won't see
a sudden interest rate hike on their cards any time soon.
Most credit cards are variable rate cards, meaning they are tied
to the prime rate, which is typically 3 percentage points above the
federal funds rate. When the federal funds rate is raised, the
annual percentage rates (APRs) of variable rate cards immediately
go up as well.
Members of the Federal Open Market Committee (FOMC) -- which
sets monetary policy -- have voted to keep the federal funds rate
at 0 percent to 0.25 percent for the past three-and-a-half years.
They have declined to raise the rate until they feel the economy is
significantly stronger.
The goal, Fed policymakers say, is to encourage consumers and
businesses to borrow, despite the uncertain economy. However, the
effectiveness of this strategy has received significant
scrutiny.
The problem, says IHS Global Insight's Paul Edelstein, is that
affordable credit with attractive terms continues to remain tough
to get, particularly if you've got less than perfect credit.
"A lot of people are out of work," says Edelstein. Among those
who are working, many of them have stagnant wages or have lower
incomes than they did before the recession. That has made it tough
for many people to pay their bills and so their credit scores have
taken a significant hit in recent years.
Meanwhile, credit standards have eased somewhat since the depths
of the recession, but banks are still picky about who they approve,
says Edelstein. As a result, large swaths of the population are
shut out from the cheapest rates.
"The Fed is going to do whatever it needs to do to keep interest
rates low, and so this is as good a time as any to take out loans
to access credit if you can, if you can get credit on favorable
terms," says Edelstein.
However, until banks lower their credit standards, many people
still won't be able to take advantage of today's historically low
rates.
In a press conference on Wednesday, Fed Chairman Ben Bernanke
agreed that the limited availability of credit did mute the impact
of ultra low interest rates at least somewhat. However, he said the
policy of keeping rates low has still been successful.
"Access to credit is a major issue. There's no question about
it," said Bernanke. "Mortgage access is much tighter than it's been
in a long time. Even credit card access is more restrictive than it
has been in the past." However, he contended, "many Americans are
able to take advantage of low interest rates."
Bernanke also pointed out that the policy has had much broader
effects on the economy, such as encouraging businesses with cheaper
access to credit to hire new employees.
No QE3 for now
The Federal Reserve also considered a third round of stimulus known
as quantitative easing, but decided to hold off until it saw more
drastic signs that the economy is deteriorating.
"The Fed has already been very accommodative, by lowering
interest rates to record lows and tripling the credit supply," says
North Carolina State University's Michael Walden. "Some economists
think any further Fed action will have little impact."
During Wednesday's press conference, Chairman Bernanke addressed
some of these concerns and answered critics who say the Fed has
already used up the tools it has to bolster the economy. "Monetary
policy by itself is not going to solve economic problems," he said.
However, he added, "I do think that monetary policy still does have
some capacity to strengthen the economy by easing financial
conditions."
Bernanke later added that the Fed is prepared to take additional
steps to help stimulate the economy, but won't do so until it has a
clearer picture of the economy's underlying strength. "We need to
get further information about the state of the economy, where
things are going," said Bernanke.
'Operation Twist' continues
While leaving short-term rates alone, the Federal Reserve said
Wednesday it will keep up one practice intended to tamp down the
cost of mortgages and other long-term rates. The Fed will sell
shorter-term Treasury bonds (which are low-interest loans to the
federal government) and buy longer-term bonds. The practice, known
as "Operation Twist," had been set to expire this month. However,
the past few months of disappointing economic growth prompted
policymakers to use one of the few tools left in their arsenal to
try to help stimulate the flagging economy.
"What the Fed has been doing has been buying long-term treasurys
from the public," says IHS Global Insight's Paul Edelstein. "In
doing so, by removing treasurys from the market, they're going to
increase the price of these securities, which would lower the
borrowing costs for consumers and businesses and
homeowners."