How Long Will Interest Rates Stay Low?

How long will interest rates stay low? Mortgage interest rates will stay historically low for the next three years.

You can stop worrying that you’re going to miss these historic low interest rates. They’ll be around for at least another three years.

The Federal Reserve announced Thursday that it would keep the Federal Funds rate at near-zero through mid-2015, or until unemployment levels drop substantially or inflation increases too fast.

“The Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015,” the Federal Reserve said in a statement.

What kind of an economy could generate such a response? One that is barely improving.

In its statement, the Federal Reserve said that “information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.”

To assist what the Fed has called  “moderate pace” of economic expansion, the Federal Reserve will launch the “QE3,” which stands for the third incarnation of quantitative easing.

The Fed announced it will buy $40 billion worth of mortgage backed securities every month for the forseeable future. In addition, the Open Market Committee will continue to reinvest dividends of its current holdings and will extend the maturity dates. All told, the Committee intends to invest as much as $85 billion per month into the bond market.

The stock market reaction was decidedly strong, with the Dow Jones, S&P 500 and NASDAQ all up more than 1 percent, nearing the highest levels since the housing crisis began.

The real question is whether this “highly” accommodating action will have the desired effect on the economy.

The idea that super-low interest rates will get businesses to invest and hire more people hasn’t proven out over the past few years. And while some homeowners are rushing to refinance over and over again, there are millions of homeowners who are underwater and can’t refinance or qualify for a Home Affordable Refinance Program (HARP) refinance.

Lending standards have tightened, so it is harder for homeowners in general to take advantage of the lowest interest rates in history.

On the other side, millions of seniors are struggling to make it with savings accounts that hardly pay any interest at all, and certainly not enough to keep pace with inflation.

Super-low interest rates favor business owners and younger Americans who are borrowing to buy homes, cars, and finance college educations. It isn’t a win for everyone unless the Fed’s highly accommodating policy winds up stimulating the economy after all.


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