The Federal Reserve’s Open Market Committee this week, as expected, kept the federal funds rate at 0 to 0.25%, and said it would continue the exceptionally low range until certain key measures are reached, like unemployment dropping to 6.5%.
Low rates are great for consumers, but make survival on margins difficult to impossible for financial institutions. However, Bankrate.com Senior Financial Analyst Greg McBride sees a new silver lining in the low rate environment for credit unions: home equity lending.
Savvy and disciplined consumers are drawing off the growing equity in their homes and investing in equities, he said.
“They’re borrowing at a low, tax-deductible rate, and after inflation, it’s like borrowing for free,” he said. “They’re not using the money to buy big screen TVs. They’re using that money to create wealth.”
McBride also said the home equity market in general will be better in 2013 than lenders have seen since the waning days of the housing boom. Stabilizing housing values, low rates and a returning appetite for borrowing among consumers could mean a pretty good year for home equity lending.
“Make no mistake, this isn’t going to be 2005 all over again, but it will better than recent years,” he said.
However, the low rate environment is bad news for auto lenders – McBride said he expects competition among lenders to sink auto loan rates even further than their current record lows. However, he said, auto lending doesn’t pose excessive risk in today’s market, from a credit or interest rate risk standpoint.
McBride said he expects “more of the same” for the economy in 2013: slow growth, high unemployment and low inflation. Wednesday’s news that Gross Domestic Product decreased at an annual rate of 0.1% in the fourth quarter of 2012 isn’t reason to believe the economy will slip back into a recession, he said.
He blamed the drop on a decrease in government defense spending and fiscal cliff uncertainty causing companies to cautiously keep inventories low.
“The underlying fundamentals were more positive than headlines,” McBride said. “It’s nothing to lose any sleep over, but it illustrates the fact that we’re in a slow growth economy.”
The Fed said it would continue its securities purchasing program at a pace of $40 billion per month and buy longer-term Treasury securities at a pace of $45 billion per month.
Curt Long, NAFCU staff economist, said it’s unclear how long the Fed will continue its latest round of quantitative easing.
“The minutes from the December meeting revealed divisions among committee members on how long to keep the program going, with some Fed officials anticipating that the program could be wound down as early as this summer,” Long said..
Four new members will join the FOMC: Jeffrey Lacker of Richmond, Sandra Pianalto of Cleveland, Dennis Lockhart of Atlanta and John Williams of San Francisco, which adds to the intrigue of how the committee will vote on the bond buying program and other policy, Long said.
“The minutes from the meeting – which will be released on Feb. 20 – will be highly scrutinized for indications of the committee’s policy directions over the course of the year,” Long said.