Fed’s last chance for pre-election rate hike is today
As the Federal Reserve Board’s Open Market Committee wraps up a two-day meeting Wednesday, the committee might raise the crucial overnight interest rate by a quarter of a percentage point in a move that — if it happens — has been a long time coming.
After dropping the benchmark target federal funds rate to an effective rate of 0 percent at the end of 2008 during the Great Recession, the Fed didn’t touch rates until it made a scant quarter-point increase last December. Even then, Fed-watchers had expected two or three increases during 2015 with about three to follow this year.
Instead, just like last year, the Fed may give us only one.
When it comes to raising rates, one former Federal Reserve chairman famously quipped, the Fed’s job is “to take away the punch bowl just as the party gets going.”
But the U.S. economy hasn’t been exactly been throwing a wild soiree. It’s less your college roommate’s bachelor bash and more like tea time with the high school French club.
The weak U.S. recovery that’s seen far too many workers idled and not even looking for work didn’t pick up steam in the way analysts and the Fed have been expecting for years, creating little of the wage growth the Fed wants to see. Add to that a twitchy stock market, an on-and-off recession in Europe, weakness in China, spotty gains in housing and consumer spending and Britain’s vote to quit the European union, and the Fed committee always has found a reason to hold off.
“A lot of this is the Fed’s own doing,” says Greg McBride, chief financial analyst at the personal finance site Bankrate.com. “The Fed has pointed to a couple of metrics in the labor market that we’ve hit — unemployment has come down and we’re finally seeing growth. By those metrics the Fed ought to be raising interest rates, but they tend to find one fallback reason or another for not raising rates.”
PNC Bank economist Mekael Teshome says what’s most important about a Fed hike isn’t the size of any increase, but the timing. Under former Chairman Ben Bernanke, the Fed increased its transparency to prepare markets for whatever move is coming, and that policy continues under Chairwoman Janet Yellen.
“Any time somebody sneezes that’s a reason for the Fed to delay it,” Teshome says. “We can raise rates and the U.S. economy will be fine. From the Fed’s standpoint, whether we agree with it or not, part of their policy is to make sure the public market has internally digested and priced in rate hikes before they do it.”
When the Fed hiked rates last year, mortgage lenders were so blase about the actual realization of something they’d been waiting for all year that the rate on 30-year fixed home loans moved down, edging from an average of 3.97 percent to 3.96 percent.
Wall Street, however, worries a lot about the will-they-or-won’t-they aspect of the Fed, largely because a string of rate hikes would require a change in financial strategy. Right now, investors can’t make any money in cash or bonds, which leaves stocks as the only option to earn much more than inflation.
All that buying has brought big stock gains. And low bond rates has allowed companies to issue low-rate debt and use that cash to buy back company stock, boosting the share price.
“This is a market rally that’s been fueled by the addiction to low rates and the market rolls over any time there’s the mere mention of rates going up,” McBride says. “The appeal of low interest rates to stock investors is that it keeps the bar low in terms of the appeal of other investment options.”
For consumers, a quarter-point hike won’t do much, even to most variable-rate loans, but it is a signal that the era of low rates will draw to a close during the next two years. Savers won’t see much if any gain on rates for passbook accounts and certificates of deposit for a while.
For borrowers, a hike means that while it’s not time to panic, it is time to lock low fixed-rate loans to replace adjustable-rate mortgages or variable-rate credit cards. At 3.43 percent, the 30-year fixed-rate mortgage is near a new low for the year, and some very attractive 0 percent credit-card balance transfer deals are still being offered to consumers with strong credit.
“Your 3 percent adjustable rate mortgage could go to 5 percent in a couple of years, and that puts a real squeeze on a household budget,” McBride says.
For now, McBride, Teshome and many other Fed-watchers think the Open Market Committee will take another pass when the Wednesday afternoon announcement comes. The Fed’s two-day November meeting is just one week before the presidential election, so the committee is expect to stand pat and avoid any charges it’s trying to influence voters.
That leaves the Dec. 13-14 meeting as the last chance for the year — again.