FLASH: The Fed’s decisive statement this week that interest rates are unlikely to rise this year sends a signal to US households: keep buying things.
The Fed tries to guide the US economy by controlling the interest rate banks charge one another for overnight loans. Moving this rate up lifts other rates in the economy, making it costlier for people to use their credit cards or to buy homes and cars. Higher rates also make companies rethink investments.
A solid majority of Fed policymakers Wednesday said higher rates are unlikely this year, leading investors to bet the economy might slowing enough for the Fed to actually cut rates.
The following are some possible consequences for American households:
The Fed’s signal on its interest rate outlook led key market rates to fall, including the yield on 10-year Treasury bonds. That is a sign that rates are also falling for loans used to buy houses and cars. Interest rates for credit cards may also drift lower. Mortgage rates have been falling since November when Fed policymakers made clear they would be patient about rate decisions.
Lower rates also encourage spending by taking the shine off some common ways to save money. Low yields reduce the return on money in savings accounts as well as in funds made up of safe-haven government bonds. This poses a problem for retirees who depend more on their income from savings and who take a hit from lower rates on Treasury bonds. The Fed has argued that retirees benefit from actions taken to support the broader economy.
GRAPHIC-Weak returns on deposits: tmsnrt.rs/2HwPA9n
Rising stock prices comprise the flip side of lower bond yields. That boosts the value of private retirement accounts, such as 401(k)s, particularly those of young people whose accounts tend to be weighted toward stocks.
The benchmark S&P 500 stock index surged after the Fed’s decision, reflecting the view that cheaper borrowing costs would help company profits. It is possible that stock market gains could boost consumer spending because people sometimes loosen their purse strings after a rise in perceived wealth.
GRAPHIC-Rate pressure: tmsnrt.rs/2UNxaEj
BUOYANT LABOR MARKET
The US jobless rate is near its lowest level in 50 years although lately there have been signs of softening in the labor market. Hiring slowed sharply in February and the number of new jobless claims every week has also been ticking higher. The Fed’s action aims to keep the labor market solid. That could help encourage more people to rekindle job searches they had given up when the economy was still weak following the 2007-09 financial crisis.
Paul Ebeling, Editor