The closer we get to the next Federal Open Market Committee meeting on July 30 and 31, the more fixated investors becomes on what the Federal Reserve will do with interest rates. A month ago, traders debated whether the Fed would cut rates a quarter or a half a point. A reduction in rates was considered inevitable – the only question was how much.
That was until July 5 when the Labor Department announced strong June employment figures. (Actually, the figures showed a smaller-than-expected slowing in the rate of positive employment growth. Read that sentence a couple of times and see if you get a headache.) The employment news reduced the Federal Reserve’s concern about the possibility of a weakening economy – and the need for a boost from a larger and faster rate cut. At present, the prospect of a half-point reduction has been almost completely dismissed, and some observers wonder if the Fed will simply leave rates unchanged.
The Fed has repeatedly said that it wants higher rates. If rates hover around zero percent when the next recession occurs, the central bank doesn’t have room to stimulate economic activity with lower rates. President Trump wants lower rates now, because all presidents want economic stimulus sooner rather than later, particularly as their next election approaches.
However, the only interest rate over which the Federal Reserve has decree control is something called the Fed Funds rate – the rate at which banks loan money to each other overnight. In the 3.5 years since December 2015, the Fed has raised this rate 2.25 points. However, unless you are a bank, there are other interest rates that are probably important to you. Real world rates have behaved quite differently.
Home buyers now have access to cheaper money, despite the Fed “raising interest rates.” Since December 2015, the rate on the average 30-year mortgage has declined from 3.97 percent to 3.75 percent. Car buyers, however, are paying more; the average rate on a 60-month automobile loan has increased a more than a full point, from 4.11 percent to 5.24 percent. If you carry a balance on a credit card (you almost certainly shouldn’t), your rate has also likely increased from an average of 14 percent to almost 17 percent.
Those are rates for borrowers. What about rates for savers and investors? How have those rates changed?
Like mortgage rates, the rate on a 10-year Treasury bond has declined a quarter of a percent. The 30-year Treasury rate has fallen a half point. Shorter-term investment and savings rates have increased, however. These include rates on bank savings accounts, money market funds, very short Treasury bills and CDs.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.