Effect of Decision to Be Felt Widely

The Federal Reserve’s pause in its credit-tightening program will give many borrowers a welcome break, putting a lid on the interest rate hikes that have made home-equity loans and credit card tabs more costly over the last two years.

But the stock market is nervous: Some investors fear that the Fed has stopped because the economy is on a slippery slope.

As for housing, because the Fed didn’t lower rates, experts doubt that mortgage costs will fall enough to give the tired real estate market a second wind.

Financial markets’ reaction to the Fed’s decision was subdued Tuesday. Wall Street had anticipated that policymakers would halt their two-year campaign of raising short-term interest rates.

Longer-term Treasury bond yields, which had fallen for four straight weeks, showed little movement. The 10-year T-note yield, a benchmark for mortgage and other long-term rates, was unchanged at 4.92%.

Stocks fell broadly but modestly. The market drifted until the Fed’s announcement at about 11:15 PDT. The news triggered a brief rally, but share prices soon reversed and most major indexes closed with losses.

The Dow Jones industrial average gave up 45.79 points, or 0.4%, to 11,173.59, its third straight decline.

Anytime the Fed shifts course with short-term rates -- raising them, cutting them or holding steady -- there are potential winners and losers in the economy and the markets.

Here’s a look at how the central bank’s pause, with its key rate at 5.25%, could affect various consumer groups and market sectors:

* Borrowers: They’re the obvious winners, at least in the near term. Banks have raised their prime lending rate in step with the Fed’s rate for the last two years, which in turn has meant rising interest costs on consumer loans pegged to the prime rate.

On Tuesday, as the Fed held steady at 5.25%, so did the prime, at 8.25%.

The pause “cuts a break to borrowers who have credit cards and home-equity lines of credit tied to the prime rate,” said Greg McBride, an analyst at Bankrate Inc. in North Palm Beach, Fla.

Home buyers also have had some relief as markets have foreseen that the Fed would go on hold. With the recent decline in long-term Treasury bond yields, the national average rate on 30-year conventional mortgages dropped to 6.63% last week from a four-year high of 6.80% in mid-July, according to mortgage financier Freddie Mac.

But home buyers, and homeowners who may be hoping to refinance at cheaper fixed rates, shouldn’t expect a steep drop in loan rates soon, many analysts say. That’s because it’s unlikely that longer-term interest rates will backtrack significantly until it becomes clearer that the Fed not only is finished tightening credit but is also ready to begin easing.

Mortgage rates will probably hold around 6.5% at least through this year, said Paul McCulley, an economist and managing director at Pacific Investment Management Co., the giant Newport Beach-based bond fund manager known as Pimco.

What happens to long-term rates is up to the next group:

* Bond investors: The Fed’s action looks like good news for investors who already have locked in yields on fixed-rate bonds, especially if the central bank is indeed finished raising short-term interest rates.

“It’s being billed as a pause, but it will morph into a stop,” McCulley said, if the Fed has forecast correctly that growth will continue to moderate and inflation pressures will ease.

Bond investors had anticipated a Fed halt by driving yields on Treasury securities lower since late June. “The marketplace is priced for [the Fed] to be finished,” McCulley said.

Indeed, yields on Treasuries of all maturities -- from three months to 30 years -- now are below the Fed’s key rate of 5.25%. The 30-year T-bond yielded 5.02% on Tuesday. Normally, long-term interest rates are above the Fed’s rate to compensate investors for tying up their money for extended periods.

Some investment pros think that longer-term Treasury bonds don’t pay enough to justify the risk of locking in those rates. David Brownlee, who oversees $10 billion in bonds at Sentinel Asset Management in Montpelier, Vt., said unless investors believed that the Fed would begin cutting rates before year’s end, it made “no sense at all” to buy a two-year T-note paying the current 4.90%.

If the economy picks up or inflation climbs, Brownlee said, the Fed could be compelled to raise its key rate at least one more time, which could jolt bond yields higher as well.

But some experts said investors might want to shift some money into longer-term bonds, in case the economy is headed for a substantial slowdown that could sharply reduce short- and long-term rates alike.

At current yields, the bond market is implicitly forecasting economic weakness “that might happen sooner and be more dramatic than what the Fed sees,” said James Sarni, a principal at Los Angeles investment firm Payden & Rygel.

* Savers: Americans who have been enjoying two years of rising yields on money market mutual funds and bank savings certificates will find that those returns will level out soon if the Fed stays on the sidelines.

The average annualized yield on money market mutual funds was 4.70% last week, the highest level since 2001, said Connie Bugbee, editor of the Money Fund Report in Westborough, Mass.

“One more Fed increase would have gotten us knocking on the door of 5%” as an average yield for the funds, Bugbee said.

Fund yields typically move in tandem with Fed changes because the funds invest in short-term corporate and government IOUs whose yields are tied to the Fed’s rate.

Bank savings yields also are likely to level out, although savers will find that some banks are more aggressive than others in bidding for deposits, depending on their need for money to fund loan demand, McBride of Bankrate said.

* Stocks: After a rocky few months, the market’s near-term direction may depend on the extent of the economy’s cooling trend, analysts say. If investors fear that the U.S. is at risk of falling into recession -- dragging down corporate earnings -- stock prices could be headed much lower.

Conversely, other investors worry that the Fed isn’t finished tightening credit because of inflation pressures.

Whatever the reason, Wall Street was on guard Tuesday. The Standard & Poor’s 500 index lost 4.29 points, or 0.3%, to close at 1,271.48. The Nasdaq composite index slid 11.65 points, or 0.6%, to 2,060.85.

Winners outnumbered losers by about 3 to 2 on the New York Stock Exchange.

Year to date, the S&P; index is up a mere 1.9%, and Nasdaq is down 6.6% -- evidence of investors’ caution.

“Clearly the market is building a slowdown” into share prices, said Michael Vogelzang, chief investment officer at Boston Advisors.

Richard Bernstein, investment strategist at Merrill Lynch & Co. in New York, said he didn’t expect the market to plunge anytime soon. But he believes investors will probably continue to favor stocks of companies whose sales and earnings should hold up reasonably well in a weaker economy -- such as drug makers -- and shy away from industrial companies, home builders and others whose fortunes depend on robust growth.