Set your smartphone alarm for 1 p.m. Wednesday. Experts say that moment will mark the beginning of the end of cheap money in America.
Dirt-cheap money. Free money. Zero-interest-rate money.
Zero has been the benchmark for borrowers and lenders, and savers and investors, since just after the lunch hour on Dec. 16, 2008. That’s when the Federal Reserve set its official interest rate at nothing. It was one of many unprecedented steps the Fed took to undo the financial crisis and heal the Great Recession.
Now, policymakers stand ready to move off the historic mark seven years to the day since they set it. Fed Chair Janet Yellen has all but promised a quarter-point interest rate hike will emerge from their two-day session, somewhere around the end of lunch this Wednesday.
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Meanwhile, Americans have learned to live, or in many cases cope, with cheap money.
Car dealers and furniture stores push merchandise with next-to-nothing financing and “same as cash” installment plans. Homebuyers and home loan refinancers found themselves able to lock in mortgage rates in the threes.
And savers — pity their prudent souls — have been forced to figure out how to get by on nothing. They haven’t seen a Fed rate hike since 2006.
“I can’t believe it. I didn’t know it was going to be eight or nine years,” said Dave Wininger, a semiretired businessman in Independence who felt forced to turn in his bank account for a roll down Wall Street. “How could this happen?”
Experts expect Wednesday’s move by the Fed to have little to no impact on savers, borrowers, lenders and investors right away. And Yellen is promising a slow fade for cheap money. The Fed has been seeing enough improvements in employment and stability in inflation to consider a rate hike this week. Decisions on future rate increases will be judged on their own.
But by taking that first step, everything will have changed.
“We all know it’s coming. Interest rates are going to be increasing sooner or later,” said Iran Amani, with the consumer credit counseling group Apprisen.
Need a new plan
Zero interest rates changed Dave Wininger’s life plans. Officially, he’s now on Plan C.
Plan A was to save money, and he did, regularly. Wininger put together a tidy nest egg that was going to cover his needs with the 5 percent or so he was earning from longer-term, federally insured, bank certificates of deposit.
Retirement was going to be a sure thing. And it was, until zero interest rates.
One by one, Wininger’s CD’s matured and he earned less and less interest on the new ones banks offered.
“I think it’s a huge problem for anybody who was responsible and saved. It’s a huge hit,” he said.
As earnings evaporated from his bank statements, Wininger learned how to understand municipal bonds. Riskier to be sure, so he avoided trouble spots like Illinois, California and Michigan that have been under financial distress.
Then, interest rates on munis bled away. Goodbye Plan B.
Four years ago, Wininger reluctantly turned to Plan C. He started watching Jim Cramer, the often hyper stock market guru on CNBC.
“I have moved into stocks out of desperation, trying to get something,” Wininger said. “They forced us into the potential for risky investments. If someone wanted return, that was the only avenue available.”
As the Fed seems set to raise interest rates, Wininger knows it will take a lot more than a quarter-point hike to revive Plan A, an FDIC-insured retirement.
“I don’t think it’s going to have any effect, but I applaud that they are taking a step that’s long overdue,” he said.
Back in two markets
Beverly Rehkop built her retirement account using mutual funds that invested in the stock market. Even at retirement in 2006, half her nest egg was in the market.
CDs weren’t going to do it.
“I was expecting a much higher return on my retirement savings,” she said, “because I worked hard to get there.”
She dodged much of the market’s damage during the financial crisis by moving into CDs. She also had money in bonds backed by mortgages for extra return.
Zero interest rates have sent her back to the stock market. Rehkop reluctantly has been moving back to a mix of stocks and bonds in her retirement savings.
“I had to take some risks,” she said, adding that she’s not nearly as comfortable with stocks now as she was nearly a decade ago.
That’s not all.
At 77, Rehkop’s back in the job market, too, working part-time in marketing and customer service for an office furniture maker. She enjoys it, and the money means her nest egg will last longer.
“I kept thinking they’d raise interest rates a heck of a long time before now,” Rehkop said. “I might not have worked this long if they had.”
Time is money
As much as zero interest rates have pummeled savers, they’ve been a blessing for housing. Builders and buyers alike have benefited.
Low mortgage rates have played such a key role in housing that word of a possible interest rate hike has helped real estate agents close deals.
A strong rate hike threat surfaced this summer as the Fed’s June meeting approached, but nothing changed. It happened again as the Fed’s September meeting neared. Again, zero prevailed.
“It’s been helpful because they keep threatening to raise it … and people scramble to lock in,” said Realtor Beverly Moore with ReeceNichols.
This time, the rate-hike talk has Tim and Deborah Vincent weighing a buy-now or buy-later decision.
“We’re getting close to retirement and are thinking about getting a smaller home,” Deborah Vincent said during a walk through at a house in Blue Springs.
Close means another four years or so. And as soon as the Fed raises rates, time means money for mortgage hunters.
The Fed’s action Wednesday directly affects very short-term interest rates and likely will have no immediate impact on household budgets, said Greg McBride, chief financial analyst at Bankrate.com.
But further Fed moves mean that in a few years, mortgage rates, car loan rates and other borrowing costs likely will be meaningfully higher.
“As the price of money goes up,” he said, “the wind is going to be blowing in the same direction.”
Deborah Vincent said mortgage rates are lower now than during any of the job-related home buys the couple made when moving to Sedalia, Columbia, Lee’s Summit, Warrensburg and then Lee’s Summit again.
“When they talk about interest rates going up it makes me want to do it now,” she said.
Now is not an option for Darren and Rebecca Meeker. In their 20s, the couple is looking around for a first home. It may take another year to save the down payment they’ll need.
“We know we want a basement and a little bit of yard space,” said Darren Meeker.
He also knows to check roofs, utility bills, electrical systems, property taxes and other features, having worked with his father who has bought and sold properties and rented them out as well.
Mortgages and interest rates, however, are new. Meeker said he wasn’t aware the Fed likely would raise rates but considers he has a year to figure things out.
“That’s my already-decided-upon New Year’s resolution, to try to get myself more knowledgeable on interest rates for mortgages,” he said.
Not now, please
Lower interest rates have helped many in the business world. Companies have been able to borrow more cheaply or refinance debts at ever lower rates.
And that was according to plan at the Fed.
But for some parts of the economy, this is no time for an interest rate hike. Manufacturing businesses have been hurting of late, particularly those tied to energy and agriculture, both of which are big in the Midwest.
Conditions are tight, too, for those involved in exports.
Martin Quinn sees all of that firsthand at Industrial Lumber Co. in the Fairfax district in Kansas City, Kan. The company builds crates that other companies use to ship their products — machinery and equipment — to buyers overseas.
“We just don’t see the quantity of orders we had 10 years ago, the size of the orders. It’s just not there,” Quinn said.
U.S. exports are suffering in part because of weak economies abroad. They’re also hurt by a strengthening U.S. dollar.
A strong dollar means foreign buyers have to convert more of their own currencies to raise the dollars needed to buy American-made goods. It’s a price increase that the U.S. manufacturer doesn’t see but the overseas customer does.
A Fed rate hike would tend to make the dollar even more highly valued over other currencies, adding to exporters’ woes.
“There’s no reason to raise it,” Quinn said of the Fed’s benchmark interest rate. “I just don’t see a huge amount of activity out there.”
Others, however, see an interest rate hike the other way around. After all, the Fed has balked repeatedly at taking a first step toward higher interest rates. Moving now surely means something.
“It seems to give people encouragement that they think the economy is improving, and that it will continue to improve,” Rehkop said. “And I have to say, I think it is.”