Fed to keep interest rate near zero for 2 years
Fed to keep interest rate near zero for 2 years
WASHINGTON (AP) – Aug. 9, 2011 – The Federal Reserve said Tuesday that it will likely keep interest rates at record lows for the next two years after acknowledging that the U.S. economy is weaker than it had thought and faces increasing risks.
The Fed announced that it expects to keep its key interest rate near zero through mid-2013. It has been at that record low since December 2008. The Fed had previously only said that it would keep it low for “an extended period.”
Fed policymakers used significantly more downbeat language to describe current economic conditions. It said so far this year the economy has grown “considerably slower” than the Fed had expected. They also said that temporary factors, such as high energy prices and the Japan crisis, only accounted for “some of the recent weakness” in economic activity.
The more explicit timeframe is aimed at calming nervous investors. It offered them a clearer picture of how long they will be able to obtain ultra-cheap credit, and it was at least a year longer than many economists had expected.
But it didn’t seem to help on Tuesday. Stocks initially fell after the statement was released, possibly reflecting disappointment that the Fed did not announce another round of bond buying.
Fed officials met against a backdrop of speculation that they would say or do something new to address a darkening economic picture. The stock market has plunged and government data have signaled a weaker economy in the four weeks since Chairman Ben Bernanke told Congress that the Fed was ready to act if conditions worsened.
The economy grew at an annual rate of just 0.8 percent in the first six months of the year. Consumers have cut spending for the first time in 20 months. Wages are barely rising. Manufacturing is growing only slightly. And service companies are expanding at the slowest pace in 17 months.
Employers hired more in July than during the previous two months. But the number of jobs added was far fewer than needed to significantly dent the unemployment rate, now at 9.1 percent. The rate has exceeded 9 percent in all but two months since the recession officially ended in June 2009.
Fear that another recession is unavoidable, along with worries that Europe may be unable to contain its debt crisis, has rattled stock markets. The Dow Jones industrial average has lost nearly 15 percent of its value since July 21. On Monday, it fell 634 points – its worst day since 2008 and sixth-worst drop in history.
The tailspin on Wall Street was further fueled by Standard & Poor’s decision to downgrade long-term U.S. debt.
Bernanke didn’t speak publicly after Tuesday’s Fed meeting. The chairman this year made a historic change by scheduling news conferences after four of the Fed’s eight policy meetings each year, but Tuesday’s wasn’t one of them.
Later this month at the Fed’s annual retreat in Jackson Hole, Wyoming, Bernanke will likely address the weakening economy, the S&P downgrade and the market turmoil.
Earlier this summer, the Fed ended a $600 billion Treasury bond-buying program. The bond purchases were intended to keep rates low to encourage spending and borrowing and lift stock prices.
Copyright 2011 The Associated Press, Martin Crutsinger, AP Economics Writer.
Fewer homes for sale, inventories fall sharply
Fewer homes for sale, inventories fall sharply
While a drop in inventories can often signal more demand – and ultimately a boost to home prices – some analysts aren’t so sure this signals a complete turnaround for the real estate market yet.
“While sales are picking up in some cities, analysts say the sharp decline in inventory also reflects the slow pace at which banks are processing foreclosures,” The Wall Street Journal reports. (The number of homes in foreclosure – a backlog of 2.1 million – is near a high.) Also, some sellers are taking their homes off the market due to low offers and waiting to put it back on the market.
In its analysis, The Wall Street Journal found that of the 28 major metro areas evaluated, inventory levels had dropped in all 28 – except for three. What’s more, they found that inventories had dropped by double digits in 16 of those markets during the second quarter when compared to a year ago. For example, inventories dropped in Miami by 43 percent from a year ago; 30 percent in Washington, D.C., and more than 20 percent in cities like Charlotte, N.C., Seattle, and San Francisco.
“We’re in a shortage situation,” Brett Barry, a real estate professional in Phoenix, said. Phoenix has a four-month supply of homes listed for sale at its current pace. “It’s a very artificial, ‘Twilight Zone’ kind of feeling, because we know there’s a lot of homes out there.”
Source: “Home Listings Fall But Woes Persist,” The Wall Street Journal (Aug. 3, 2011)
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Mortgage rates have nowhere to go but up
Mortgage rates have nowhere to go but up
WASHINGTON – Aug. 1, 2011 – If you’re considering buying a home or planning to refinance, here’s some advice: Lock in a mortgage rate. Now.
Mortgage rates could shoot higher if lawmakers fail to reach an agreement to raise the debt ceiling by Tuesday, says Greg McBride, senior financial analyst for Bankrate.com.
But even if default is averted, there’s little downside to locking in a rate.
A government default would cause Treasury bond prices to plummet, and yields would rise. “Uncle Sam’s borrowing rate is the baseline from which all consumer and business borrowing rates are determined,” McBride says. “If Uncle Sam’s costs go up, borrowing costs go up for everybody.”
And even if the default is short-lived, the ratings agencies have signaled they’ll downgrade U.S. debt. That would also drive up consumer rates, because the government would be forced to pay higher rates to bond investors.
“Consumers might look back on this period six months from now and regret it if they don’t take action,” says Mona Marimow, senior vice president for LendingTree, a loan comparison website.
Mortgage rates are at historic lows and unlikely to go much lower. The average rate for a 30-year fixed-rate mortgage for the week ended July 28 was 4.55 percent, only slightly higher than a week earlier, according to Freddie Mac. Rates slipped on Friday after the Commerce Department reported that the economy grew at a lower-than-expected 1.3 percent in the second quarter.
Borrowers who want to lock in low rates need to act fast, says Keith Gumbinger, vice president of HSH, a publisher of mortgage data. “If the government does default, it’s going to be hard to lock in an interest rate,” he says.
How the debt-ceiling crisis could affect other consumer rates:
• Credit cards. Interest rates would likely rise, although not right away, McBride says. Credit card issuers are required to give you 45 days notice before they raise your interest rate.
Most credit card interest rates are tied to the prime rate, which wouldn’t be affected by an increase in Treasury rates, he says. However, card issuers would likely increase the margin they add to the prime to calculate the rate they charge consumers, he says.
You can protect yourself from a rate hike by paying off your balance – which makes sense even if the government doesn’t default, McBride says. “I don’t think there’s ever a good reason to keep a high credit card balance,” he says.
• Certificates of deposit. Savers who hope that higher Treasury rates will boost low CD rates will be disappointed, McBride says. Those rates won’t improve until banks increase lending, and that’s not going to happen if there’s a downgrade or default, he says. And if a default causes safety-seeking investors to flood banks with cash, McBride adds, rates could fall even more.
© Copyright 2011 USA TODAY, a division of Gannett Co. Inc., Sandra Block.