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Borrowers and Savers React to Fed’s Low Interest Rate Hold

[Tuesday, November 8th, 2011]

Earlier this month, the Fed recognized the weakening American economy, and in an effort to help revitalize it, extended the near-zero short-term interest rate for another two years.

Low interest rates could help or hurt credit card holders. Habitual borrowers may be pleased with the news, while habitual savers may feel the strings on their wallets tighten. Those who borrow will benefit from the banks, because they will be issuing more loans to consumers with higher credit scores. On the other hand, savers will stack up money and watch it sit in low-interest savings accounts.

Because of the Credit Card Accountability, Responsibility and Disclosure Act, banks change their average percentage rates to coincide with variable rates. This means that credit card interest rates could easily fluctuate as well, with the Feds news.

“At the moment, there doesn’t seem to be any pressure on credit-card issuers to increase the APR’s on overnight loans,”__ at said. “It merely seems that banks are opening up more accounts to consumers with outstanding credit scores. So consumers that already have mastered the principals of borrowing will reap the rewards from this.”

Most savings accounts have an interest rate of under 1%. Money doesn’t grow in that type of interest environment. Savers may end up sitting on piles of cash, adding only a dollar to their account annually, according to the representative.

The Federal Reserve announced the lowered fixed-interest rate in hopes that consumers will change their ways and begin to buy more large ticket items. The Fed expects that consumers will be enticed by the low interest rate and will be motivated to buy larger items such as cars, houses, large appliances and equipment. America’s weak economy is dependent on consumers purchasing these goods. If consumers purchase more of these goods, the economy will shoot back to a level of normalcy that we haven’t seen in almost five years. Many analysts don’t believe that lowered interest rate will stimulate the economy as the Fed hopes. It seems that consumers are more interested in saving their money now and finding the best deal, rather than keeping up with the Joneses’.

Low interest rates are a double-edged sword. Low interest rates have the potential to revitalize an economy, but have also contributed to half a century lows in American mortgage rates – which among other factors uses the interest-rate scale. Low interest rates also affect certificates of deposit (CD). In three years, interest rates on a one-year CD plummeted from 2.38% to .42%, according to Many money-market mutual-fund yields are at only .01%. These low rates don’t compare to the rising inflation – which rose 3.6% last year alone.

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