- The Washington Times - Wednesday, June 29, 2005


Feeling the pinch from the Federal Reserve’s yearlong campaign to raise interest rates? Chances are you have a home equity line of credit or owe money on your credit cards.

But for other borrowers, it’s been a mixed bag. Rates for 30-year mortgages, for example, have gone down.

For savers, rates on a one-year certificate of deposit have risen over the past year, but rates on five-year CDsbarely have budged.

“It’s a mixed picture. Short-term rates have climbed from extremely low levels, while long-term rates are at or near historic lows,” said Lynn Reaser, chief economist at Banc of America Capital Management. “This discrepancy in rates has affected borrowers and savers.”

A puzzled Federal Reserve Chairman Alan Greenspan has called the divergence of short-term rates and long-term rates a “conundrum.”

Mr. Greenspan and his Fed colleagues are poised to raise their key short-term interest rate, the federal funds rate, by one-quarter of a percentage point to 3.25 percent when they wrap up a two-day meeting today. That would be the ninth such increase since June 2004, when the Fed began to tighten credit.

In response, commercial banks are expected to boost their prime lending rates by a corresponding amount to 6.25 percent, which would be the highest since summer 2001.

Before the Fed embarked on its rate-raising campaign, the prime rate, used for many short-term consumer loans, stood at 4 percent, the lowest level since 1958; the federal funds rate, the interest that banks charge each other on overnight loans, was at 1 percent, a 46-year low.

But the Fed over the past year gradually has been reining in the easy credit, an approach aimed at preventing inflation from becoming a problem while keeping the economy growing.

The average rate on a home equity line of credit, which is pegged to the prime rate, is now 6.2 percent, up from 4.7 percent a year ago, said Greg McBride, a senior financial analyst at Bankrate.com.

Rates on variable-rate credit cards, also pegged to the prime rate, averaged about 13.04 percent in the spring, up from 10.76 percent last year, he said.

Despite the Fed’s eight rate increases, a key long-term rate — on the 10-year Treasury note — dropped to 3.91 percent on Monday from 4.8 percent a year ago. The 10-year Treasury note influences long-term mortgage rates. As a result, rates on 30-year mortgages now stand at 5.57 percent, the second-lowest level recorded this year.

A year ago, 30-year mortgages averaged 6.25 percent.

Because long-term rates are low, people can refinance interest-rate sensitive short-term debt and lock in a longer-term rate.

“That takes a lot of the burden off consumers,” Mr. McBride said.

The interest-rate climate is also a mixed bag for savers, who over the past several years have faced measly returns as interest rates had fallen to extra-low levels.

The average rate on a one-year CD is now 2.76 percent, up from 1.51 percent a year ago, Mr. McBride said. But rates on five-year CDs haven’t improved much. Those CDs currently are fetching about 3.73 percent, compared with 3.60 percent a year ago, Mr. McBride said.

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