By Pam Luecke
Start studying the tea leaves.
After an unusual period of rock-bottom interest rates, everyone is now looking for signs that the Federal Reserve will begin to nudge rates upward. Although the Fed raised the discount rate slightly in February – that’s the rate banks are charged to borrow from the Fed – it’s been almost four years since the Fed raised its target for the more closely watched federal funds rate. That’s the rate banks charge each other for overnight loans and it more directly affects the rates they will eventually charge you and me.
The Fed, of course, doesn’t signal its intentions with Klieg lights. So we are left to parse the lines in Fed statements, minutes and governors’ speeches.
Fed-watching is fun, in a geeky sort of way, but your readers and viewers might appreciate your efforts more if you prepare for writing about the meaning of interest rate increases when they resume. An increase by the Fed – some guess this summer, others say not until 2011 – will be a sure sign that economic recovery has arrived. As you prepare, you might also find stories to write now about the consequences of such a prolonged period of low interest rates.
Interest rates cut both ways. When they go up, so does the cost of consumer borrowing – for most everything from an automobile to a college education. (Mortgage rates, as the subprime debacle proved, march to a different drummer.)
But higher interest rates mean good news for the savers in your audience. People who once counted on interest income to make ends meet have had a rude awakening in the past few years, with rates on a 12-month certificate of deposit averaging less than 2 percent and once-generous money-market funds now paying close to nothing.
Here are three angles to look for when the interest rates begin to turn – or perhaps even while you wait:
1) Retirees: Older people on fixed incomes got hit with a double-whammy this year. First, because inflation has been so low, Social Security payments didn’t increase for the first time in 35 years. Then, the income they had counted on from their carefully laddered CDs dramatically dropped. If you had planned for, say, $4,000 a year in income from a $100,000 CD – not an unreasonable expectation historically – you are now lucky to see half that amount. If the Fed raises its key interest rate and banks subsequently raise their rates for savers, visit your local senior center or retirement community and see what residents have to stay. Or visit them now to hear some genuine tales of woe.
2) Bonds: Look for two perspectives on the bond story as interest rates rise – that of investors and that of issuers. Many investors nervous about stocks and disappointed with bank interest rates have turned to bonds as a substitute during the past year and a half. In fact, the Investment Company Institute reports that bond mutual funds have seen an inflow of cash every week since the beginning of 2009. Demand for individual bonds has also been generally brisk. But when interest rates begin to rise, bond prices on the secondary market typically fall. Holders of individual bonds who want to sell before their bonds mature will face a loss of principal. Similarly, investors in bond mutual funds may find their returns declining.
Rising interest rates could have a ripple effect for bond issuers, including government agencies that are in dire need of revenue this year. With city and state tax revenue low because of the recession, more state agencies are issuing debt to finance projects – and investors have been eager to buy the bonds because they are often tax-free. But when bank interest rates turn upward, the relative appeal of tax-free bonds might wilt. If your city or local hospital is hoping to issue bonds to support a new project, talk with the finance director about the outlook – and the implications of higher interest rates for the project’s cost. Ask too about Build America Bonds, subsidized by the U.S. government as part of the 2009 stimulus package. Although income from these bonds is taxable, they have been well received by investors – and by state and local governments.
3) Credit cards: Most provisions of the sweeping credit-card reform act passed by Congress last year began to take effect in February. And while the law added many safeguards for consumers, one thing it didn’t do was put a cap on the interest rate credit card issuers may charge on unpaid balances. When interest rates resume their rise, keep in touch with consumers and credit counselors about what’s happening with those credit cards. Cardholders must now be given 45 days’ notice before interest rates go and interest rates are not supposed to rise within the first year after you open an account. But there are exceptions to these rules — and issuers have traditionally been quite resourceful about finding ways to ensure that their businesses remain profitable. Good reporters will keep an eye on whether the law creates any unintended consequences.
The law’s rules, incidentally, were promulgated by the agency everyone is watching for a sign about interest rates: the Federal Reserve.
More information: Credit Card Accountability Responsibility and Disclosure Act
Pam Luecke was the initial Reynolds Endowed Chair in Business Journalism; her success at Washington and Lee University paving the way for the naming of subsequent business journalism chairs.