3 Reasons to Be Relieved About the Fed's Interest Rate Decision
Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
On Thursday the Federal Reserve announced it will hold off on raising interest rates until the U.S. job market shows further improvement and inflation is back to a healthy 2%.
What does that have to do with you?
The Fed's benchmark short-term interest rate has hovered close to zero in the years since the financial crisis. There are certainly downsides to delaying a rate hike, and some argue waiting will just cause more market uncertainty and volatility. But for many Americans continued low rates will be good news. Three reasons why:
1. Your credit card and loan rates will stay cheap for a little longer.
Low interest rates might frustrate you when you look at your bank account and see you're earning only pennies on your savings account—and it's true higher rates would help with that. But a recent Fed study has found that banks take months and months to pass higher federal rates onto savers. What banks do more quickly—of course—is pass higher rates onto borrowers, who might see the rates they owe for mortgages, loans, and credit cards rise rapidly after a rate hike.
That means that when rates finally do rise, taking out a mortgage could get more challenging and carrying a balance on your credit card, while never a good idea, could sink you even deeper into debt. Given that the Fed will revisit interest rates in December, today is perhaps a good time to lock in offers you might see for 18- or 21-month 0% balance transfers, says LowCards.com CEO Bill Hardekopf.
Read Next: The Fed Left Interest Rates Alone — What That Means for Your Money
2. Getting a job (or raise) won't get harder
One reason the Fed follows employment trends carefully before deciding to raise rates is that tighter money supply and more expensive borrowing costs can make it tougher for employers to rapidly hire new workers.
Although the U.S. unemployment rate is now only 5.1%—the lowest level we've seen since March 2008—the Fed announcement shows the central bank is still nervous about the job market and doesn't want to hamper further improvement.
3. Markets are getting buoyed—or at least buffered
Don't get too excited—investors will now have to keep playing the same "will they or won't they" guessing game until this winter when the Fed meets again on a possible rate hike.
But for now, a continuation of low rates seems to be just what the market wanted to hear. Close to the market close on Thursday, the major stock indexes were headed toward only a tiny gain (if any) for the day, but that's likely because the Fed's move had already been widely anticipated. An increase in rates might have spelled much worse news for investors: If bonds start to pay higher yields, equities become comparatively less attractive, which drags down the stock market. Foreign and particularly emerging markets could also be hurt by higher rates in the U.S., since investors previously accepted extra risk abroad to get higher returns. That seems less necessary in a rising rate environment.
Finally, as bond prices drop in response to rising interest rates, bond holders see their current investments lose value—bad news if you're already holding a lot of fixed income. Then again, investors primarily looking for income from their bond funds might be disappointed by the Fed announcement for one reason: Those funds eventually start paying higher yields as managers begin acquiring new, higher-rate bonds.