The era of cheap money isn’t over yet.
The Federal Reserve appears all but certain this week to raise interest rates for the first time in nearly a decade, but after markets move, politicians react, and investors adjust their bets, those rates will remain near rock-bottom levels and stay there for some time to come.
The Fed, which has held its benchmark short-term rate near zero since the end of 2008, is expected to boost it by a quarter-point at its policy meeting Wednesday. After that, the cycle of rising rates is likely to unspool at a snail’s pace, far more gradually than during the expansions that followed the recessions of 2001 and 1990-91, analysts said.
By this time next year, most economists expect the benchmark, called the federal funds rate, to stand at about 1 percent. That means there is not a lot to worry about for consumers who haven’t yet bought a house or signed up for zero-interest credit cards, economists said.
“There should be no fireworks as the result of the decision,” said Mark Zandi, chief economist of Moody’s Analytics, a research unit of the ratings agency Moody’s Corp. “I don’t expect to see any impact.”
The likely move by the Fed and trajectory of future increases are the result of growing confidence in the US economy, tempered by lingering concerns that the expansion remains fragile. Unemployment has slid to 5 percent and hiring has advanced at a solid pace, with employers adding 211,000 jobs in November and 2.6 million over the past year. Wages and incomes are rising, albeit slowly, and consumer spending, which accounts for about 70 percent of US economic activity, has been robust.
But weak growth globally — underscored by plunging oil prices — poses risks to a US economy that has yet to completely shake off the effects of the last recession, economists said. The percentage of working age Americans with a job or looking for one — just 62.5 percent in November — is just off of 38-year lows. Millions of Americans have stopped looking for work, and millions more are working part time because they can’t find full-time jobs.
“The economy is doing well, but it’s not booming” said John Silvia, chief economist for Wells Fargo & Co., in Charlotte, N.C. “Where is the push to increase rates any further?”
Interest rates are the main tools used by the Fed to manage the economy. The central bank cuts rates to spur borrowing and spending when the economy is weak, and raises them when the economy strengthens to keep it from overheating and sparking high inflation. The Fed’s Open Market Committee, which sets monetary policy, slashed the benchmark rate to near zero seven years ago as the financial crisis plunged the US and global economies deep into recession.
Federal Reserve chair Janet Yellen suggested this month that the economy is now doing well enough to absorb a rate increase, although she and other Fed officials have said they expect to tighten credit gradually.
“They don’t want to risk anything,” said Ozlem Yaylaci, a senior economist with IHS Global Insight in Lexington. “It will be a slow adjustment.”
Yaylaci expects the Fed to raise rates four times next year, each time by a quarter-point. In contrast, when the Fed resumed raising rates in 1994, it boosted them six times to 5.5 percent from 3 percent. In the tightening cycle that began in June 2004, policy makers raised rates more than 2 percentage points in a year, to 3.25 percent from 1 percent. Rates peaked at 5.25 percent in mid-2006. Yaylaci forecasts that rates will peak at 3.25 percent in late 2018 and remain there into 2020.
Lara Gordon, a realtor for Coldwell Banker Residential Brokerage in Cambridge, expects modest increases in mortgage rates to do little to slow Greater Boston’s booming real estate market. Higher rates may cut some people out of the market, she said, but interest charges will remain low as higher employment and improved wages encourage people to buy.
Mortgage rates, which are not tied directly to the Fed’s benchmark, have ticked up in anticipation of Fed’s action to a national average of just under 4 percent for a 30-year-fixed loan, according to Freddie Mac, the government sponsored mortgage company. Its economists forecast mortgage rates will rise gradually, ending 2016 at an average of 4.6 percent. “People will not stop their searches because the rates are going to go up,” said Gordon. “Nobody is expecting astronomical increases. “
Households are unlikely to feel much of an immediate impact from the rate hike, said Greg McBride, chief financial analyst at Bankrate.com. Savers, hoping to collect more interest on their bank accounts, are likely to be disappointed, he added. This long period of low interest rates has forced many banks to live with slim profit margins. As loan rates rise, McBride said, banks are likely to try to make the most of them by holding the interest paid on deposits at current levels.
“Unfortunately,” he said, “higher rates aren’t going to filter down to savers.”