Historically, to curb inflation, the federal government increases interest rates. The current 2 percent inflation in the United States does not justify an interest-rate hike, said Ian Glassford, senior business relationship manager at Wells Fargo Bank.
After significant speculation, the Federal Reserve System (the Fed) Board of Governors agreed and did not increase interest rates at its meeting last week. However, Fed Chairwoman Janet Yellen said the vote was close and the board still could raise interest rates later this year. It meets again Oct. 27.
The current Federal Reserve benchmark rate of 0.25 percent has been constant since December 2008. In September 2007, the rate was at 5.25 percent, compared to 1990, when it reached 8.25 percent.
The benchmark rate is the interest rate the Fed establishes for banks to lend to one another; it’s tied to all interest rates — for loans and investments — and is used in government policy-making.
“We’re doing well in the U.S. The rest of the world isn’t,” Glassford said, explaining that the strong U.S. performance is due in part to our relatively low natural gas cost.
“It’s cheaper to produce a widget here,” he said.
The Fed “is in no hurry to move rates higher, because they’d have to pay more to repay the [$17 trillion] debt,” Glassford said. “It’s just not in their best interest… pardon the pun.”
The national unemployment rate, housing starts, foreign markets, the domestic market and turmoil in the economies of China and others were also considered by the Fed in its decision, Glassford said.
“We’re still in abnormal times,” he said.
Globally, interest rates have been dropping for the past 20 years.
“Despite the magnitude and persistence of the … downtrend, the explanation for the decline is one of the most vexing questions … today,” said a report released in July by the White House. “The future path of interest rates is even less clear.”
Currently the second-largest economy, China has experienced a noticeable slowdown recently after a period of major growth.
According to the National Bureau of Statistics of China, as reported by tradingeconomics.com, that country’s Gross Domestic Product annual growth rate averaged nearly 11 percent from 1989 until this year. In 2015 its current rate of growth has declined to 7 percent, which is “still robust,” said Jeffrey Jensen, financial advisor with Morgan Stanley Wealth Management in Colorado Springs.
Age affects impact
The Fed’s decision will affect people differently, depending on their age, he said.
“For younger people refinancing their house or borrowing money, it’s a real positive the Fed didn’t increase rates,” Jensen said.
“But [if you’re] a senior living off your fixed income, you’re hardly getting any interest on your investments. I don’t see any impact right now based on this decision.”
Jensen predicted the Fed will slowly increase interest rates over time, saying: “The consensus on Wall Street is that they’ll probably raise rates by the end of the year, but I think they’re going to wait until 2016.”
Allan Roth, certified financial planner and founder of Wealth Logic LLC, wrote in a Wall Street Journal article that at the current rate of bank savings accounts, “even with the power of compounding, it will take 6,932 years to double your money.”
To earn a higher return, Roth suggested people should buy long-term CDs with less severe early-withdrawal consequences.
He said people will earn more by paying the penalty and reinvesting the money in a higher-rate CD. He further suggested that people research DepositAccounts.com to explore their various buying options.
Certified Public Accountant Mike Piper said bond interest rates are difficult to predict.
“In part, this is because the actions of the Federal Reserve are not perfectly predictable,” Piper said.
“Bond interest rates are influenced by things other than the Fed. For example, in late 2008 when the [U.S.] stock market was crashing, demand for bonds increased, driving rates down … that would have been the case regardless of what the Fed was doing.”