Low Interest Rates Could Hurt More Than Help

WASHINGTON (TheStreet) -- Federal Reserve policymakers last week held the overnight lending rate near zero to keep the economic recovery on track by making credit easier to access. But the benefits of a low rate might be diminishing for consumers.

Because nearly 70% of credit cards sport variable interest rates, one might think that the Fed's decision to stick to a near-zero strategy would be a boon for many Americans. Instead, in a scramble to beat new consumer protection regulations that go into effect on Feb. 22, card issuers have been raising rates, boosting fees and decreasing credit lines. Many credit lines also have baselines built into their products. Read the fine print and you may find that your card won't fall below 15%.

On the surface, the Fed's policy would also seem beneficial for new-car buyers. But those dealers offering attractive loan terms may be doing so to help sell slow-moving vehicles, irrespective of monetary policy. The fed funds rate impacts used-car loans even less. Used-car loans are more likely to reflect supply and demand, and default trends, which are tied to unemployment. Buyers will bad credit will continue to pay high rates.

"From a consumer standpoint, a marginal increase in interest rates will probably not have a material impact on the way people spend or save," says Srini Venkateswaran a partner with the financial institutions group at consultancy A.T. Kearney. "But I also don't believe [keeping rates near zero] stoked the economy to the degree that was expected."

Even mortgage rates might not see much of a change.

"As the fed funds rate falls, the mortgage rate does not come down to meet it," says Susanne Trimbath, chief executive of research firm STP Advisory Services and a former document editor for the San Francisco Federal Reserve. "If people look at where it says how your rate is calculated for mortgages, home equity loans and even credit cards, not many of them are tied to the fed funds rate."

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