Worried about Interest
On March 22, 2005, the Federal Reserve's rate-setting
committee raised the short term interest rates for the
seventh time since last July. This time the Fed raised
the rates by one quarter bringing it to 2.75. Fears
of the economy escalating too high were main reasons
for the increase. The Fed is obviously trying to fight
or stay above inflation. For the past ten months the
Fed has been referring to the current status as a “pace
that is likely to be measured”, meaning is plans
on continuing to raise rates gradually by quarter point
The Fed and most economists believe that the rates
are still too low. However some fears arise from the
situation. For instance when the Fed is trying to outrun
inflation it increases interest rates. This can be very
discouraging for job growth and num up the economy.
Historically, when interest rates are dropped a stimulant
economy as well as invited inflation arises. At the
current state of rates the fed seems to be at a happy
medium, but no one knows how long we can outrun inflation
and not cause problems for the economy.
Results will be seen soon for consumers who have home
equity lines of credit and variable-rate credit cards.
How the increase will affect mortgages, auto loans,
as well as other long term interest rates is not totally
predictable at this point. The Fed really has no control
over long term rates. It indirectly controls the federal
funds rate by withdrawing and adding cash to the banking
system from the selling and buying of securities.
Most people do knot know if this current rate increase
will effect them in a negative, positive, or impartial
manner. Broken down here is an overview of who gains
and who loses from the recent March 22nd interest rate
Home shoppers and Owners neither gain nor lose. Monthly
house payments will not be effected if you already have
a fixed rate mortgage. For people shopping for fixed
rate mortgages there should not be any effect at the
current state of things. Although the Fed has had a
little success in their efforts to cause long term interest
rates to rise, Long term interest rates respond primarily
to inflation expectations and the Feds increases usually
head off inflations. Looking at it that way, the Feds
increases would serve to put a lid on fixed mortgages.
Borrowers from a home equity line of credit come off
as losers in the current situation. Home equity lines
of credit, HELOC, have variable rates that move up and
down with prime rates. Since the prime rate will immediately
rise, current holders will most likely see rates adjust
upwards in the next few payments, all depending on how
often rates are adjusted by the lender. It seems to
be too soon to tell how the rates will affect those
who borrow from a home equity loan. It is just too soon
to guess what will happen to rates for those who are
out shopping for loans judging from past trends.
New and used car loan rates both continue to stagnate,
making auto shopper’s potential losers. Since
rates charged on vehicle loans are closely tied to the
prime rate which is also sensitive to rates changes
by the Fed.
Credit card debtors seem to be definite losers with
the current rate increases. Although there are many
fixed rate cards out there to protect consumers, there
is no guarantee that rates on new cards will not change
as the Fed projects to keep moving up rates. Variable
rate credit cards continue to rise in current months
where fixed rate cards have stayed at the same amount
for the last few months. In any case it is best to pay
off credit card debt as quickly as possible.
Adjustable rate mortgage shoppers and holders are also
losers with current increases. Rates will certainly
increase for those holding adjustable rate mortgages,
ARM, when their monthly, six month, or yearly adjust
periods arrive. By historical standards rates are low,
Making it likely, but not certain, that they will be
higher in a few years.
In any case it is apparent that the Federal Reserve
does not plan on halting rate increases any time soon.
With that being said it is important to review all financial
ventures before entering them to see if they are right
for you and your budget. For those who are already financially
obligated it is always crucial to keep watch on the
market and trends that the Federal Reserves seems to
be setting through their adjustments to current interest