Consumers Should Soon See Benefit of Fed Patience on Rates

So much for those worries about rising interest rates.

Just a few months ago, rising rates were bearing down on everyone from home buyers to stock investors after the Federal Reserve put through seven quarter-point increases in 2017 and 2018.

This year, the Fed has changed course. In January, it opened the door to a “patient” approach to further rate increases. Then on Wednesday the central bank surprised the market when it said it may not raise rates at all during 2019.

The move — or anticipated lack of moves — reverberated immediately through the bond market, and the yield on the 10-year Treasury note tumbled to its lowest level in more than a year. It fell as low as 2.52 percent, down from 2.61 percent late Tuesday and from more than 3.20 percent as recently as November, as traders priced in expectations for a slower economy and tame inflation, as well as this very patient Fed.

The impact should soon filter out to consumers across the economy, and the effects will likely remain for a while. The yield on the 10-year Treasury, which influences rates for all kinds of consumer loans, could drift higher over the next year, but it’s not likely to cross above 2.75 percent, said Ed Al-Hussainy, senior currency and rates analyst at Columbia Threadneedle Investments. That would mean rates for the next year would remain lower than they’ve been for much of the past year.

“The Fed no longer has an appetite for tightening rates above” a level that would slow the economy, Al-Hussainy said. “That signal is quite strong right now and lowers the ceiling for 10-year yields.”

Here’s a look at some of the move’s beneficiaries:

BORROWERS

When the Fed was busy raising interest rates for much of the last few years, rates on credit-card borrowing were quick to follow. Experts say these rates are the most sensitive to changes in the federal funds rate, so the Fed’s move Wednesday should bring relief, at least from further increases.

The average rate on credit-card accounts that were charged interest was 16.86 percent in the last three months of 2018, according to the Federal Reserve. That’s up from 14.99 percent a year earlier.

“The pause by the Fed will be a relief for those carrying large credit card balances as it will keep their payments from rising further,” said Chris Gaffney, president of world markets at TIAA Bank.

HOME BUYERS, HOME OWNERS

A drop in mortgage rates would be welcome for buyers as they head into the spring home buying season.

The average rate on a 30-year fixed mortgage has been trending down since November, falling with Treasury yields. It was at 4.28 percent this week, down from 4.94 percent a little before Thanksgiving. Wednesday’s tumble for Treasury yields indicates mortgage rates have room to fall further.

Such an easing would be welcome help for the housing market, which struggled last year as potential buyers got priced out by rising mortgage rates. It could also mean opportunities for people who already own homes and are looking to refinance.

STOCK INVESTORS

Lower interest rates can encourage borrowing and more economic growth, and stock investors are nervously scrounging for the latter given a slowing global economy.

Lower rates can also make stocks more attractive as investments because they make the competition look worse: A Treasury bought today will pay less in interest than one bought before. Stocks that pay high dividends can get a particularly big boost from low rates because their payouts look more lucrative.

Of course, lower rates are not a panacea. They hurt savers and retirees who had just started to enjoy higher rates on their money-market accounts and bonds following years of earning very little.

Low rates also raise the risk of inflating prices for investments into bubbles, such as those that ultimately led to the crashes of tech bubble in 2000 and the housing bubble in 2008.

“We’re in a very different world today,” Fed Chairman Jerome Powell told reporters at a news conference, stressing that the Fed is now carefully monitoring financial conditions and stability in ways that it didn’t previously.