Higher Fed rate may turn 'nothing' to something
By GETAHN WARD
Mary Carroll Orme chose one word to sum up how much she's earned on her certificate of deposit over the past year.
That's why the Nashville retiree breathed a sigh of relief yesterday after the Federal Reserve Board raised short-term interest rates for the first time in four years. For savers such as Orme, the rate hike could mean slightly more in interest on their CDs, savings and money-market accounts, all key sources of income for the elderly and others on fixed incomes.
''I've heard a lot of people say they're barely getting by since interest went down,'' said Maurine Simpson, vice president for the advisory council at Senior Citizens Inc.'s Knowles Senior Activity Center in Nashville.
Simpson was referring to the 13 interest-rate cuts the Federal Reserve engineered starting in early 2001 as the central bank sought to fight a recession by lowering the cost of borrowing money. Yesterday's shift comes as the U.S. economy is beginning to show signs of strength, including a rebound in job growth.
The Fed yesterday essentially raised to 1.25% from a 46-year low of 1% its target for overnight loans between banks. As a result, Midstate banks were expected to boost their prime lending rates to 4.25% from 4%, a move that would affect borrowers and others with payments pegged to the prime rate.
Although savers can expect to earn higher rates on deposits, borrowers also could see interest payments go up on credit-card balances and business loans. People borrowing to buy cars and signing up for mortgages, including fixed- and adjustable-rate loans, also will be paying more. Mortgage loan rates already had been edging higher before the Fed's action. Some area banks have reported an increase in commercial loan volume as companies sought to lock in lower rates before the Fed's move or use interest-rate protection products.
Experts generally agree that it will take a series of interest-rate increases for the shift in strategy by the Fed to make a significant difference for most seniors.
''It's just the first domino to fall,'' said Greg McBride, senior financial analyst at Bankrate.com of North Palm Beach, Fla., a consumer finance Web site, about yesterday's cut. ''It's going to take a lot more dominos falling for CD yields to rebound completely from 13 interest-rate cuts.''
Higher interest rates also reduce sale value of some bonds, which are another popular investment vehicle for seniors. Jane Petropoulos, 60, of Nashville said that's why she has mixed feelings about the Fed's move.
''I doubt if anybody notices the difference in their savings accounts,'' she said, adding that banks often don't pass on the full increase to depositors. She said some seniors could be hurt if higher costs get passed on to consumers for services such as housing through increased rents.
Banks are keeping a close eye on the Fed's strategy. With more rate hikes expected as the months go by, some banks are promoting longer-term CDs to lock consumers into current rates, an action that would help banks keep their cost of funds low as rates rise.
McBride advises consumers not to fall into that trap and suggests sticking with CDs with maturities of 12 months or less, which would allow consumers to more easily snag higher rates on deposits as they come along.
Although seniors largely prefer less-risky alternatives such as deposit accounts and bonds, the prolonged low-rate environment coaxed some to invest in the stock market to chase bigger returns.
Mary Walter of Nashville, for instance, said she cashed in her CDs and put money in stocks as interest rates fell. She remembers in the early 1980s when CDs paid as much as 19% in interest, she said, though double-digit inflation ate into the earnings. ''I don't think you can make money if don't you take risks,'' she said.
Six months before the Fed began cutting rates in early 2001, a one-year CD paid 5.6% in interest. That compares with today's 1.48% national average.
''I'm pleased,'' said Orme, holder of a 15-month CD that will mature after this fall's presidential elections. ''I'm tired of not getting anything on my money market and on my CDs, too.''
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