This week's Fed meeting really matters -- here's why
With the Federal Reserve set on Wednesday to consider what could be its biggest monetary policy decision since the financial crisis -- when to hike benchmark interest rates from their historic lows -- savers and borrowers alike should ready for the impact.
"The average person should care what the Fed does. Even if you aren't an investor, interest rates affect mortgage rates, car loans or a child you might have who has to take out a loan to go to college," JJ Kinahan, chief market strategist at TD Ameritrade, told CBS MoneyWatch. "Your day-to-day life is very influenced by interest rates, whether you know it or not.
A key nuance experts are looking at is if the Financial Open Market Committee, the Fed's rate-setting panel, will remove the word "patient" from its policy statement, which will be released Wednesday afternoon after a two-day meeting.
As the economy has recovered, the Fed has reaffirmed its commitment to remaining patient in normalizing monetary policy. Fed Chair Janet Yellen and other FOMC "doves" have argued that the economy is still slack enough that it requires support, saying it's premature to start hiking rates.
But many analysts expect the central bank to soften that stance on Wednesday. The change in wording would signal the Fed's intention to start a gradual series of rate increases in the Fed funds rate, or the interest rate at which depository institutions lend to each other overnight. Most forecasters think the first rate hike will in June, July or September.
"We are going to see interest rates move higher, as the expected date of the first increase come into view. Credit card borrowing costs, car loans and mortgage loans are going to get more expensive," said Gus Faucher, senior economist at PNC Financial Services Group. The process will be drawn out and start with longer-term loans, such as mortgages, he added. "Once the Fed actually does raise rates, credit card rates should start moving higher."
"The flip side is the reason the cost of borrowing is going up is the Federal Reserve thinks the economy is stronger, it's a sign of confidence in the economy from the Fed," Faucher added.
And while higher interest rate loans are not necessarily good news, the positive side is that those with savings will get a higher rate of return, which could be increasingly important as more and more Americans retire. As for those who retired ahead of the Fed cutting rates to near zero, "There is opportunity for them to get more for the money they have left," Kinahan said.
If the Fed does remove "patient" from its approach to monetary policy, it would "only be doing so because they feel the economy is sufficiently strong for a shift in monetary policy," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
The takeaway for the average person should be the Fed believes "things are going well, and eventually they'll see a translation to them in higher yields on deposit accounts, checking, savings and money market accounts," he added.
Wall Street's focus on whether central bankers cut a single word from their statement is likely not shared by ordinary Americans. And whether it should matter to Main Street is debatable, given that the effect of changing the wording will be more psychological than anything else.
"Even if they do raise rates in June, a rate hike at that point is more symbolic than anything else. We're still going to be at historically low interest rates. For active traders, it's a different story," said Mike Meyer, vice president of Everbank World Bank Markets.
"A lot of time and energy is spent by forecasters on picking the exact month rate hikes may begin, but individual investors can take a step back and recognize that the short-term timing signaled by a change in wording is much less important than the long-term change in the trend in interest rates and the view by policymakers that the economy is increasingly strong enough to support it," said Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co., in an email.