For the typical consumer, the Federal Reserve's outlook for interest rates means that rates won't improve much this summer, but they also won't get much worse.
Inflation is another story.
Fed Chairman Ben Bernanke indicated today that the agency will likely hold off on cutting its interest rate target any further, saying, "For now, policy seems well positioned to promote moderate growth and price stability over time."
Consumers are getting crushed by several factors -- including high prices and paltry savings rates -- that are indirectly linked to the Fed rate target. Certain existing loans with variable interest rates have dropped, but not all. Banks are not necessarily passing lower rates down to new borrowers and credit-card debt is largely unaffected.
Here's a look at how holding the rate target steady at 2% will affect your debt, savings and spending:
The Fed began shaving down its rate target in September to lower the cost of borrowing and free up the tightened credit markets. The target directly affects the rate banks charge one another for loans. However, it also has an indirect effect on consumer debt that is pegged to target -- from variable-rate mortgages to auto loans.
If your interest rate is pegged to the Fed's decisions, you have probably reaped the benefits of the rate-cutting campaign already. The general consensus among economists and observers is that the Fed's next move will be to raise its rate target -- if it changes the target at all this year -- but nothing is certain. For now, enjoy the lower interest costs.
If you're trying to get a new loan, there are no guarantees. Banks are not necessarily passing down lower rates to the consumer level, as they try to shore up their battered financials. They also have worked to mitigate risk by tightening lending standards, so if your credit score is not amazing, you might not be offered a loan at all. If you are, you will almost certainly not be offered a competitive rate.
When it comes to credit cards, some
are pegged to the Fed target. However, lenders have a lot of latitude when it comes to boosting rates on unsecured debt, and sometimes do so at will, particularly in the current risk-averse market.
In short, don't expect your credit-card APR to fall, even if rates have declined on your other debt.
As the Fed has cut its target and banks have worked to build up cash levels in the turbulent market, rates on savings products have dropped so low that most don't even meet inflation.
Inflation is now near 4%, the highest level in about two years. By contrast, CD yields are generally around 2.25%, and savings and checking accounts are under 1%.
are in the 3% range.
Yields on money-market accounts generally float down to about a half-percentage point below the Fed rate, to account for the fees that fund managers receive. They are now at about 1.9%.
If you locked in a competitive rate before the current market turmoil, you're in luck. Otherwise, if you're seeking competitive returns, don't store all your cash in such savings products.
The Fed's rate cuts also have been a key driver of inflation, because they make the dollar less valuable relative to other currencies. Prices for commodities that are traded in dollars -- such as oil, grains, meats, gold, steel -- rise as the dollar drops, along with prices for imported products.
That leads to higher prices for just about everything the U.S. consumer buys. (Never mind traveling abroad.)
If the Fed stops cutting its rate target or boosts the target, it could help stabilize prices or moderate their increase. However, the Fed's moves aren't the only factor affecting prices in today's global marketplace. Among other elements sure to keep prices elevated are strong demand from developing countries including India and China, commodity-market speculators, the summer driving season, turmoil in oil-producing countries, farmers' planting activities, livestock diseases and weather patterns.
U.S. gasoline prices are near $4 per gallon, on average, and much higher in certain markets. With the summer travel season kicking off, it's almost certain that those prices will climb further, along with airline-ticket prices and costs for everything that has to be transported using fuel.
Food and metals prices are also unlikely to abate much because of global demand. If they do drop from record highs, they'll still be much more expensive than in previous years.
For now, it seems, high prices are here to stay.