Rate Cut: For Many, It Is Either Upside or Downside : Impact: Some cheer and others bemoan action that deeply affects variable-interest loans and investments.
Liesel Friedrick, a Santa Monica homemaker, was debating the merits of an interest rate cut while scrambling to get her kids ready for summer camp. Lower rates would help the economy--and they might help her sell a New York condo, she said.
In West Hollywood, Patricia Van Ingen argued that a rate cut would be a disaster. A retiree, who lives mainly on fixed-income investments, Van Ingen says low rates “are hell for senior citizens.”
As the Federal Reserve Board met Thursday to deliberate the direction of interest rates, millions of consumers--many of whom otherwise have little or no interest in finance--were anxiously waiting and watching.
The agency’s final decision to cut rates slightly--by a quarter of a percentage point--cheered some, angered others and ultimately served to underscore the difficulty that Federal Reserve Chairman Alan Greenspan faces when attempting to steer the economy by adjusting key interest rates.
Interest rates have a sweeping and direct impact on everyone from homeowners to travelers to savers. And over the last several years, as Americans have embraced investments and loans that rise and fall with interest rates, consumers have become increasingly aware of how their lives are impacted by the Fed’s decisions.
Unfortunately for policy-makers, the impact is as diverse as it is sweeping. Travelers and retirees on fixed incomes are hurt by rate cuts, while investors and borrowers are enriched.
And, thanks to America’s increasing reliance on rate-sensitive investments and the wide swings that interest rates have taken in the last five years, nearly everybody is “sensitized” to just how the Federal Reserve’s policy decisions affect them, says Keith Gumbinger, analyst with HSH Associates, an interest rate research and publishing firm in Butler, N.J.
“People are more directly affected by changes in interest rates than they were a few years ago,” says Mitchell E. Kauffman, a Pasadena-based certified financial planner. “Whether it is through their mortgage or their investments, people are more likely to be in variable-rate situations today.”
Adjustable-rate mortgages were virtually nonexistent in 1980; they now account for significantly more than half of all mortgage loans outstanding, says Ella Allen, a spokeswoman for the Federal Housing Finance Board.
Three of four credit card loans are now adjustable, adds Robert McKinley, publisher of CardTrak, a credit card newsletter. And home equity loans, which surged in popularity in the last decade, are also largely adjustable, bankers note.
*
Meanwhile, when the interest rates of the 1980s started to dip in the early 1990s, millions of investors abandoned fixed-rate bank deposits for income-producing mutual funds. Assets in bond and income mutual funds more than doubled over the last five years to nearly $744 billion, says Chris Wloszczyna, a spokesman for the Investment Company Institute, a Washington trade group.
Where interest rate swings don’t hit principal value when putting money in bank certificates of deposit, they are of paramount importance when investing in bonds because the value of existing bonds rises when interest rates fall and falls when interest rates rise.
Rates dropped steadily until they hit 28-year lows in 1993, according to HSH. Those declines cut borrowing costs for millions of Americans and bolstered returns in the stock and bond markets.
However, rates rose sharply in 1994 and early 1995, decimating the value of bonds and bond funds and causing adjustable-rate borrowers to pay hundreds of dollars more each month.
“I know some people who have adjustable mortgages and adjustable credit cards, and, boy oh boy, their disposable income just vaporized . . . when interest rates started to go up,” McKinley said. “The Fed’s latest rate cut isn’t enough to have people pulling out the fireworks yet. But it’s significant in that it could signal that the worst of the rate adjustments is over.”
The Fed’s modest interest rate cut may not hit consumer pocketbooks for months. Generally, rate cuts take about three to six months to filter through to consumers in lower rates on credit cards and mortgages.
*
However, new borrowers--people in the market for homes, for example, will get an immediate boost, says realtor Lyn Graham of MacGregor Realty in La Canada.
“Every time they reduce interest rates, it makes it easier to qualify for a loan,” Graham says.
Additionally, those who invest in corporate stocks have seen their portfolios soar during the last several days, as the markets anticipated the Fed move. The Dow Jones industrial average rose 48.77 points after the Fed announcement, closing at an all-time high of 4,664.
“I made a lot of money today,” beamed Frank Glazer, a Los Angeles-area investor.
Still, not everyone is delighted by lower interest rates. Retirees who live on fixed incomes find it increasingly difficult to get by when rates are low.
“For an older person, low-interest rates are terrible,” says Van Ingen. “We have no other way to make money. I’m almost 70. I can’t handle the risks in the stock market.”
Carl Lans, an 88-year-old Huntington Beach retiree who invests in floating-rate preferred stock, was also hurt by the Fed’s action Thursday. Both the dividend and market value of some of his preferred shares tend to rise and fall in tandem with interest rates.
But it’s not just senior citizens who lament the effect of lower rates. Debt-free younger people also see negatives.
Ann Friedman, a Culver City-based art historian, for example, says she’s not happy about the rate cut for a simple reason: She likes to travel, and lower U.S. interest rates tend to cause the value of the dollar to slide against foreign currencies.
