In an announcement that comes as no surprise, in large part because it has been repeatedly telegraphed by the the Fed itself, the Federal Reserve Board on voted on Tuesday to leave interest rates at their current near zero rates. The Fed further reiterated its commitment to doing so for the near future, pledging to keep rates low through at least the middle of 2013.
There are several interesting implications for investors and consumers in the Federal Reserve’s actions and statements today. First, as mortgage lending continues to languish and be a rather slow and dour corner of finance, homeowners should take solace in the fact that there is no rush. While there is no guarantee rates will stay exactly as low as they are, the Fed’s continued commitment to low interest rates means that neither new mortgage interest rates or adjustable mortgage rates are going up any time soon.
Second, the Fed announced that it would continue to implements the so-called “twist” in which the Federal Reserve is moving its short-term bond holdings to longer-term bond holdings in an effort to bring down long-term interest rates. Longer term rates are traditionally less influenced by the Fed, which sets only the short-term overnight lending rate that banks use. However, this new wrinkle may prevent longer-term rates from rising, even if they were prone to do so. Again, this is good news for homeowners, though bad news for those trying to get better rates from longer-term bonds like pension funds.
Interest Rates Rising Soon is Myth
Third, the vote to keep interest rates low was 9 to 1, but it’s not what you think. The 1 vote against was not to raise interest rates, but rather a vote against current Fed action being insufficient. In other words, not only has the Fed committed to continuing ultra-low short-term interest rates, it is doing so unanimously with one member wanting low rates and then some. This is important because it shows that there is absolutely no reason to expect interest rates to rise anytime soon.
Fourth, while the Fed is very concerned about the U.S. economy and its lackluster growth, it did note that the economy IS actually growing. This is good news on several levels. It means that things are moving in the right direction, assuming that neither Europe, nor Washington, screws it up. It also means that the Fed is not going to kill off a weak economy by trying to thump it’s “inflation hawk” credentials.
Finally, although the Fed is leaving rates low and pledging to do so for an extended period of time, there is has been absolutely no talk of another round of Federal Reserve led stimulus for the U.S. economy. A third round of quantitative easing, or QE3, is not in the cards for the near future. I guess we don’t have to worry about Rick Perry indicting Federal Reserve Chairmen Ben Bernanke for treason before the U.S. elections.
What Fed News Means for You
What today’s news means for you is that if you are currently doing well enough, there is no reason to think that things will change. If you have been hunkering down, so to speak, fearing the worst, it is probably time to lower your guard a bit.
If you have been narrowly skating by in this long and lingering recession, then things are starting to look up. It looks like the economy is growing, albeit slowly, and that means things like lending, financing, and other money based systems should be getting better over the next year.
The two dark spots in all of this are housing and the job market. The amount of economic growth being seen is not enough to begin generating anywhere near the number of jobs needed to make up for millions of out of work Americans who lost their jobs. However, it does look less likely that solid companies will be dragged far enough down that they must lighten payrolls again.
Housing is still the big concern. Economic growth or no, foreclosure rates are still very high and lots of people are underwater on their mortgages. If you are just a bit underwater and want to stay in your home, riding this out is the way to go. If you are way underwater, it is probably time to look at all your options, including drastic measures. You want to be ready to recover when the economy does. Getting hit now makes you one of millions. Taking a hit a year or two after the economy starts to rebound puts you behind.