Interest rates near zero are holding

The Federal Reserve is rewarding people who are looking for mortgage, auto and personal loans with a continued near-zero interest rate. The good news for borrowers is that it will probably last for a little while. The Federal Open Market Committee aims to keep the federal funds rate between 0 and .25% throughout January. The importance is that banks make overnight loans between themselves at federal funds rates and that influences short term loan rates, variable rate credit cards and short term CDs. So far it’s been thirteen months straight that the Fed has kept the federal funds rate at the current near-zero rate.

Change is going to come

Though the near future of interest is most likely safe, things could change. The first signs of legislators wanting to push the funds rate upwards are showing. Thomas Hoenig, a member of the Federal Open Market Committee said he thinks the “economic and financial conditions had changes sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.” The chief economist for Quicken Loans, Bob Walters, said the statement is the “first crack in the armor.” He believes once a few more committee members start agreeing with Hoenig, the rate most likely will start elevating.

Borrowers and savers

For now keeping the federal funds rate low is good news for borrowers but not so good news for savers. Keeping the rate so low means that yields on insured bank deposits are going to stay low. For instance, the national average for money market accounts in January was 0.24%. Certificates of deposit were about the same. For anyone looking to save, this is not the best time and that’s on purpose. The Fed encourages people to borrow and lenders to lend.

In addition to the federal funds rate being kept low, the Fed also bought more than a trillion dollars’ worth of mortgage-backed securities since the end of 2008. The idea behind the buy was to “reduce the cost and increase the availability of credit for the purpose of houses.” Anyone that is looking for a mortgage, auto or personal loan could have an easier time of doing so than they normally would. Walters added, “The Fed is making the loan process as easy for as many people as possible. The idea is to put money back in people’s pockets.” The Fed is hoping that increasing consumer’s assets causes them to return to their old ways of spending.

The future of the market

The Fed announced that after March of 2010 it will stop buying mortgage-backed securities. Everyone in the mortgage industry knows what that means: most likely, mortgage rates will quickly start rising. The increase in mortgage rates might be moot, according to Adam Quinones, a mortgage analyst. He said, “There isn’t a better time for the Fed to make an exit.” In addition, interest rates on securities will start rising slowly. For anyone looking to take out mortgage, home equity, auto or personal loans, now could be the best time to do it.