The loss of a single word has money markets spinning. The Federal Reserve no longer says it will be “patient” in starting to raise its benchmark interest rate. It could signal the Fed’s intention to raise interest rates for the first time since the Great Recession of 2008. What does it mean to your business and even your family budget? Bankrate.com Chief Financial Analyst Greg McBride spoke with NJTV News Anchor Mary Alice Williams about what it all means.
According to McBride, what the Fed is doing by removing the word “patient” is “laying the ground work for the eventuality of higher interest rates.”
“By taking the word ‘patient’ out, they’ve basically given themselves the option, but not the obligation, that they could raise interest rates as soon as June if conditions warrant it. But markets are pretty optimistic that given what the Fed has said about the economy and what their estimates are for the economy that it’s probably not going to come in June,” he said. “So even though the Fed took out the word ‘patient’ and seems to be indicating that they’re on this pathway towards eventually raising interest rates, markets aren’t buying that it’s going to come as soon as June.”
Unemployment is down to 5.5 percent and the economy is growing at 3 percent, but McBride says interest rate inconsistencies over such a prolonged period are affecting interest rates not moving.
In terms of economic growth, he says that “we’ve actually had a period of disappointing growth. The fourth quarter growth was pretty slow, first quarter is not expected to be a whole lot better. We’ve kind of had these ups and downs and that inconsistency is why we’ve had such a prolonged period of interest rates not moving.”
He explains further, saying, “When the economy continues, expands, when it’s growing at a fast rate, you have the potential for inflation to pick up and that’s the point where the Fed needs to corral things by raising interest rates. When they raise interest rates, they’re raising the cost of money and that acts as bit of a head-wind on the economy, slowing down growth but also slowing down the escalation of prices.”
What does this mean in terms of credit card debt and mortgages? He offers average consumers some helpful tips: “I think your action steps now are this: refinance your mortgage. Fixed mortgage rates are currently under 4 percent. There’s no guarantee they’re going to stay there as the year progresses — particularity if the Fed raises interest rates.”
“In terms of credit cards, grab those 0 percent balance transfer and introductory rate offers now because later in the year as the Fed moves away from 0 percent interest rates, credit card issuers are likely to do the very same thing. And chip away at that variable rate debt — credit cards, student loans, home equity lines of credit — now before rates start to move higher,” he said. “The key point here is rates are going to go up pretty gradually. This is not going to be a sea change overnight, but you’ve got the tail wind of low interest rates now, make use of that now before interest rates start to move up.”
Many wonder if we will ever see interest rates this low again.
McBride says heaven forbid.
“The only reason we got rates this low is because of the financial crisis and a near depression and it was these near 0 interest rates that were needed to stave off a depression and even worse economic outcome,” he says. “So heaven forbid that we ever get back to these levels, but that’s one of the reasons that the Fed has to start raising rates now. They need a little bit more ammunition for the next time the economy rolls over.”