US Fed keeps rates low, but braces for the inevitable

WASHINGTON (AP) – Record-low interest rates will be around for at least a few more months, the Federal Reserve made clear Wednesday.

Enjoy the easy money while it lasts.

By mid-2015, economists expect the Fed to abandon a nearly six-year-old policy of keeping short-term rates at record lows. Those rates have helped support the economy, cheered the stock market and shrunk mortgage rates. A Fed rate increase could potentially reverse those trends.

Mortgages could cost more. So could car loans. Investors could get squeezed.

“Borrowers should see the writing on the wall,” said Greg McBride, chief financial analyst at Bankrate.com. “Interest rates are eventually going to go up. They should pay down variable-rate debt and keep an eye on that adjustable-rate mortgage. They don’t want to be caught flat-footed.”

Investors, in particular, might recall that mere speculation about the end of the Fed’s stimulus shook global financial markets in May 2013. In coming months, as the prospect of higher rates nears, traders might once again dump stocks and bonds and send prices tumbling.

Higher yields on bank accounts and CDs could provide some modest relief for savers and retirees who have struggled for years to get by on meager interest income. But any gains they receive could be diminished by the likelihood that inflation will be higher once the economy is strong enough for the Fed to end its ultra-low rate policy.

Still, on Wednesday, Fed policymakers once again decided: Not yet.

The central bank said it intends to keep its benchmark rate near zero as long as inflation remains under control, until it sees consistent gains in wage growth, long-term unemployment and other gauges of the job market.

The Fed retained language signaling its plans to keep short-term rates low “for a considerable time” after it ends its monthly bond purchases after its next meeting in October.

The decision sent the Dow Jones industrial to a record high. The Dow closed up about 25 points to its 16th record high this year.

“What we heard from the Fed today is really what investors like to hear,” McBride said. “The stimulus isn’t going to go away overnight.”

In its statement, the Fed said it will make another $10 billion cut in the pace of its Treasury and mortgage bond purchases, which have been intended to keep long-term borrowing rates low.

“In the Fed’s mind, the economy still has work to do, but it’s improving,” said Mike Arone, an investment strategist with State Street Global Advisors.

The Fed also clarified the process by which it will eventually unwind its low-rate policies. The Fed said it would first raise its key short-term rate before it stops reinvesting its bond holdings, which have driven the Fed’s balance sheet to a record of nearly $4.5 trillion.

The central bank also issued updated forecasts for growth, inflation and interest rates. The median short-term rate supported by Fed policymakers at the end of 2015 is now 1.38 percent, up from 1.13 percent at its June meeting. This suggested pressure from some Fed officials for a faster rate increase than the Fed’s statement implied.