DENNIS SEID: Keeping the rates low won't help everyone

By Dennis Seid/NEMS Daily Journal

If you’ve parked money in CDs or savings accounts, you likely groaned a little louder after last week’s Federal Reserve announcement.
The Fed decided to keep its benchmark interest rate at near zero for at least another two years – late 2014 at the earliest. Last year, it said it would keep the rate low until mid-2013, but concerns about economic recovery convinced the Fed to hold out a little longer in hopes the economy would move a little faster.
In theory, low interest rates keep down borrowing costs. Thus, businesses can borrow money to expand, add jobs, etc. Consumers can take advantage of lower mortgage rates, lower auto loan rates, etc.
Exporters benefit from a cheaper dollar, which means lower prices for buyers of U.S. products.
And the U.S. benefits because it can sell securities at low rates to buyers, who have helped pay for our burgeoning debt.
But for savers, lower interest rates mean lower returns on their investments.
The Federal Reserve’s Open Market Committee in December 2009 set its target federal funds rate at a range of zero to 0.25 percent. That’s helped drive 30-year mortgage rates to around 4 percent or less – historic lows that should encourage potential homebuyers.
If only there were more of them. But the economy hasn’t yet been helped by the housing industry as it has in the past. The latest new-homes sales report showed a decline of 2.2 percent in December, ending what was already the worst year in sales.
Nationally, sales of new homes fell 6.2 percent last year to a record-low of 302,000. At their peak in 2005, sales of new homes hit 1.28 million.
With still-too-high unemployment, there probably won’t be a buying binge anytime soon. But the national and state jobless numbers appear to be improving. Even in Northeast Mississippi, which has been saddled by high unemployment rates the past three years, there are hopeful signs.
When more people are working, more people will buy homes. It’s as simple as that.
But are low interest rates spurring business borrowing?
There is ample evidence that many businesses are sitting on a pile of cash. However, they’re reluctant to invest in equipment, expand their facilities or hire more people because they don’t know what’s ahead for them.
Think Obamacare, and an unknown regulatory environment.
Smaller businesses looking to borrow are finding that lending is still tight with many banks, who are still cautious in the aftermath of the 2008 financial meltdown.
Consumers looking for loans will have their credit histories and credit scores closely examined before the first dimes come their way.
No one has a proven solution yet. But, the Fed last week reaffirmed its current plan – hoping that keeping rates low will eventually jumpstart the economy.
For Grandpa Joe and Aunt Louise, let’s hope they can hold on a little longer to their low-yielding CDs and savings accounts and the Fed’s plan works.
Dennis Seid is the business editor of the Daily Journal. Contact him at (662) 678-1578 or dennis.seid@journalinc.com.