Bring on higher rates

Thursday, July 01, 2004
By Julia Bauer
The Grand Rapids Press

Even a fractional bump in interest rates appeals to retirees such as Meta Bok.

"I think I'm earning just over 1 percent on the CD I have now," said Bok, 72. "Every time you would open a statement, you'd see you lost a little more money."

After 13 rounds of lower and lower interest rates, the Federal Reserve Board and Chairman Alan Greenspan pushed rates a tad bit higher Wednesday. The boost from 1 percent to 1.25 percent is the first hike in four years.

Those rates are expected to go steadily higher, possibly hitting 4 percent. That's bad news for people who need to borrow money. But it's a happy target for senior citizens and investors trying to make their money grow.

"I'm very optimistic," Bok said Wednesday. The last time she went to the bank to renew her certificates of deposit, "they said this is probably as low as it can go.

"They said it might take 10 years to get back to where we were, although it went down in five," Bok, a Grandville retiree, said with a wry smile.

A friend, Irene VanderKlay, is 80. Last month, her refrigerator quit and she had to put two new tires on her car.

"You don't get a chance to save anything, between a pension and Social Security," the Grand Rapids retiree said. When the stock market dropped, she cashed out and opened a savings account. "I was just hoping I could save a little bit."

Senior citizens on fixed incomes turn to CD investments as a safe, if low-earning, place for cash, said Linda Bruce, senior reporter for bankrate.com.

"They have gotten hit so hard over the past few years with interest rate cuts," Bruce said. Although inflation is a low 1.5 to 2 percent, it still tops the interest paid on CDs.

"There's a whole slew of areas where the daily cost of living is rising way faster than inflation. They're not even preserving their principal with these kinds of investments," Bruce said of the elderly.

The Fed's decision was unanimous, suggesting that central bank policy-makers see no immediate need to aggressively restrain economic growth to head off inflation.

The federal funds rate had held for a year at 1 percent, the lowest level since 1958. That news reassured Wall Street investors, who don't want rates to rise too abruptly.

All of the major stock exchanges gained ground, with the Dow Jones industrial average rising 22.05 to 10,435.48.

Changes in the federal funds rate, which banks are allowed to charge each other for overnight loans, eventually affect the interest rates consumers and businesses pay for credit.

Wall Street barely shuddered at the rate hike, three months after it was first intoned.

"The Federal Reserve has done a good job of signaling their intentions to the market," said Scott W. Wagasky of AMBS Investment Counsel LLC in Grand Rapids.

Greenspan told the financial market to expect a series of baby hikes, each in the 0.25 percent range, in the months ahead unless something changes dramatically, he said.

The fact is, a quarter of a percentage point increase in interest translates to just $2.50 per $1,000 in savings per year.

Borrowers, meanwhile, will have to pay more. The biggest hit for Americans will be in credit card debt, which totals some $750 billion.

About half of the credit cards in the country have variable rates, which "will go up in tandem with the prime rate, which is driven by what the Fed does," said Robert McKinley, chief executive officer of CardWeb.com Inc.

Cardholders could see the higher rates sometime in July, he said.

 

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