Interest rates have become a highly visible issue with news items about rate changes almost everyday. Much of the press coverage concerns the Federal Reserve and its chairperson, Janet Yellen. The Federal Open Market Committee (Fed) monitors the economy and makes changes to the key “overnight loan” rate that influences interest rates throughout the economy. By adjusting this rate, they try to keep inflation under control and stimulate the long-term economic growth.
The Fed lowered this rate several times beginning in 2001 to stimulate the economy and provide liquidity in the financial markets. In the summer of 2004 the Fed started gradually raising the rate as the economy strengthened and to keep inflation in check. That policy continued to be employed through 2005 and early 2006. At the August 2006 Fed meeting, they decided to not raise the rate after 17 straight increases. The rate remained constant through the summer of 2007. In the fall of 2007, the Fed started reducing rates.
In 2008, the Fed reduced rates several times in response to a weakening economy and to provide additional liquidity as financial markets dealt with uncertainties in the sub-prime mortgage and other credit markets. By January, 2009, the Fed had reduced their targeted fed funds rate to a range of 0% to 0.25% and kept that target through early 2015. In December 2015, they raised their range to 0.25% to 0.5%.
Interest rates also play a major role in our economy and in our daily lives, especially when it comes to borrowing.
Develop a Borrowing Strategy
The wise use of credit can be an important part of your personal and business financial strategies.
- Use common sense. Never borrow what you can’t repay.
- Prioritize your borrowing based on long-term value.
- Reserve some borrowing capacity for emergencies.
- Consider all the terms. Borrowing can be confusing. Review all the terms and conditions before you sign any credit application.
- Get help if you need it. If your borrowing gets out of control, take immediate steps to solve the problem. Contact lenders to work out a repayment plan. Quit using (or cut up) credit cards. Seek the help of a qualified credit counselor.
Today’s Low Rates
Interest rates have fallen to record low levels. They may go lower or they may not. Accurate predictions of future interest rate movements are almost impossible. To take advantage of the current low rates, here are two ideas to consider.
Real Estate Loans
Mortgage rates are low on a historical basis, as are many home equity loan rates. Now is a great time to get a mortgage on a new home, refinance an existing mortgage or use a home equity loan to consolidate your debt with a lower rate (and potentially tax advantages). Be sure to compare your current rate with those available now. In addition, you may want to consider a different type of mortgage with a shorter term if you plan to sell your home in the relatively near future.
All credit cards are not alike. Differences in fees, interest rates and associated benefits for using the card should all be considered when choosing the one that makes most sense for you. If you carry over balances and pay interest on those balances, having a card that charges lower interest rates can mean the difference of hundreds or thousands of dollars each year. With an average balance of $5000, the difference between an 8% and 18% rate means $500. You owe it to yourself to compare rates and make sure you are not paying a higher rate than you have to.