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Borrowers get a breather

Wed., Aug. 9, 2006

WASHINGTON – With the economy losing momentum, the Federal Reserve halted the longest unbroken stretch of interest rate increases in recent history Tuesday – a reprieve for millions of borrowers after more than two years of rate pain.

Ben Bernanke, in the most important decision he has engineered since taking the Fed helm in February, led his central bank colleagues in holding a key interest rate steady at 5.25 percent. The vote was 9-1, with one Fed bank president pressing for another increase.

It marked the first time in more than two years that the Fed did not boost rates.

The decision to take a breather comes as economic growth is slowing – a development that Fed policymakers suggested should eventually help lessen inflation risks posed by lofty energy prices.

To fend off inflation, the Fed had steadily bumped up interest rates 17 times – in modest quarter-point increments – since June 2004.

The goal is to slow the economy enough to prevent inflation from taking off while not crimping activity so much that it brings on recession.

The decision to hold the federal funds rate steady means that commercial banks’ prime lending rate – for certain credit cards, home equity lines of credit and other loans – stays at 8.25 percent.

That’s welcome news for borrowers, who have watched interest rates march higher over the past two-plus years.

Borrowers with variable-rate debt, including credit card and home equity lines of credit, probably won’t see their rates go up in the near future.

“But borrowers with adjustable-rate mortgages aren’t out of the woods yet,” warned Greg McBride, senior financial analyst for in North Palm Beach, Fla. “The cumulative effect of all the increases to date mean your rate is going to go up – next month, in the next six months or sometime next year.”

Perhaps the most important thing the Fed did Tuesday was give itself room to maneuver, said analyst Charles Rotblut of Zacks Equity Research in Chicago.

While the Fed did not raise the nation’s benchmark interest rate, the central bank said in its policy statement “some inflation risks remain,” and it left open the possibility of further rate hikes to try to contain inflation.

The Fed “has left itself with plenty of flexibility going forward,” Rotblut said.

Because there’s a lag between Fed action and economic change, “we will not know if today’s decision was correct until early winter,” Rotblut said. But he argued that the Fed was better off erring on the side of more inflation than insufficient credit.

Ed Keon, chief investment strategist at Prudential Equity Group in New York, said the Fed’s move could be good for the stock market, which has been volatile in recent weeks as investors tried to anticipate what the Fed would do.

With the economy having slowed in recent months – in part because of higher rates – some investors and economists are worried about a possible recession. But Keon called it unlikely, saying: “I believe we’ve seen the worst of the uncertainty and expect stock prices to move up – with some ups and downs – for the rest of the year.”


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