Interest rates near zero are holding
The Federal Reserve is rewarding people who are looking for mortgage, auto and personal loans with a continued near-zero interest rate. It’s good news for any borrower and considering the state of the economy, it most likely will last a bit longer. The Federal Open Market Committee sustained its target for the federal funds rate to stay between 0 and .25% throughout the month of January. The importance of the move is that banks make overnight loans to one another at the federal funds rate and that influences rates on short-term loans, variable-rate credit cards and short-term CDs. So far it’s been thirteen months straight that the Fed has kept the federal funds rate at the current near-zero rate.
Change is going to come
Though the near future of interest is most likely safe, things could change. The first signs of legislators wanting to push the funds rate upwards are showing. One member of the Federal Open Market Committee Thomas Hoenig said he believes that the “economic and financial conditions had changes sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.” Chief economist for Quicken Loans Bob Walters said, the statement is the “first crack in the armor.” He believes that when a few more committee members agree with Hoenig, the rate will begin to increase.
Borrowers and savers
For now keeping the federal funds rate low is good news for borrowers but not so good news for savers. Keeping the rate so low means that yields on insured bank deposits are going to stay low. For instance, the national average for money market accounts in January was 0.24%. Certificates of deposit were similar. Anyone looking to save isn’t going to find this the best time, which is by design. The Fed is pushing people to start borrowing and lenders to start lending.
In addition to the federal funds rate being kept low, the Fed also bought more than a trillion dollars’ worth of mortgage-backed securities since the end of 2008. The goal for the purchase was to “reduce the cost and increase the availability of credit for the purpose of houses.” Anyone that is looking for a mortgage, auto or personal loan could have an easier time of doing so than they normally would. Walters added, “The Fed is making the loan process as easy for as many people as possible. The idea is to put money back in people’s pockets.” The Fed is betting that people that can get more assets will return to previous spending habits.
What’s next for the market
The Fed announced that after March of 2010 it will stop buying mortgage-backed securities. The mortgage industry knows what is probably coming: mortgage rates will probably rise. The increase in mortgage rates might be moot, according to Adam Quinones, a mortgage analyst. He said, “There isn’t a better time for the Fed to make an exit.” Interest rates on securities will start to increase slowly as well. For anyone looking to take out mortgage, home equity, auto or personal loans, now could be the best time to do it.
