December 7, 2004

THE FED'S DETACHMENT FROM REALITY:

Borrowers' paradise expected to continue: Despite four rate hikes in '04, savers are losing out to a sluggish economy. But beware, an expert said. (Todd Mason, 12/07/04, Philadelphia Inquirer)

Interest rates are still enticing borrowers - and disappointing savers - despite four hikes by the Federal Reserve Board in less than six months.

Blame a twitchy economy, said Keith T. Gumbinger of HSH Associates, a Pompton Plains, N.J., market research firm. That means consumers aren't borrowing much, so banks are offering low rates to entice borrowers. With lending activity lackluster, banks aren't trying to attract money from savers.

"Banks don't really need you now," he said, stating the obvious for savers.

Consider PNC Bank's yield of 1 percent last week on a one-year certificate of deposit, up just 0.05 percentage points since the Fed began raising rates June 30, according to a weekly Bankrate.com survey. The Fed has doubled the key rate under its control since then.

Meanwhile, Beneficial Savings Bank, of Philadelphia, recently lowered its rate on five-year home equity loans to 4.49 percent from 4.99 percent.

And TruMark Financial Credit Union's members, who are area phone company workers, pay 4.49 percent on four-year used-car loans, which is less than the prime rate that banks charge their top corporate borrowers.

Experts expect more of the same in 2005, despite the Fed's self-described "measured" pace of rate hikes.


With deflation and a strong economy why would lenders drive real interests rates up to the point where no one will borrow when they can make money quite easily at lower rates?

Posted by Orrin Judd at December 7, 2004 5:57 PM
Comments

A "twitchy economy"? A nearly 4% real annual GDP growth economy is twitchy? Even with the price of oil doubling? And a war? "Twitchy" must be a complement!

Posted by: Bret at December 7, 2004 6:21 PM

Rates go up so long as there are borrowers willing to pay those rates. Now that oil is starting to come back to reality, and the effects of the Florida hurricane are receding into the past($3.99/lb for green peppers at my local supermarket two weeks ago, $1.49/lb today), inflation is even more on the backburner.

Posted by: Bart at December 8, 2004 12:47 PM

I attended a lecture by Peter Yesuwich yesterday.

According to him, personal indebtedness is up two-thirds since 2000.

It's true they are not applying to banks for loans at 6 or 8%. They're just putting it on the nevernever at 14 or 18%.

Posted by: Harry Eagar at December 8, 2004 9:51 PM

Harry,

Then they take a second or they refinance their house at 6 or 7. If they are so dumb as to pay 16-18 percent for a year or so, they deserve to get wiped out. Screw 'em.

Posted by: Bart at December 9, 2004 6:39 AM
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