Fed's expected pause gives borrowers room, savers opportunities to lock in rates

Tuesday, September 19th 2006, 1:08 pm
By: News On 6

WASHINGTON (AP) _ The Federal Reserve is expected to keep its finger on the interest-rate pause button, giving borrowers more time to catch their breath and savers a chance to lock in some respectable rates.

After two-plus years of rate pain, borrowers finally got a reprieve in August when Fed Chairman Ben Bernanke and his colleagues decided to halt a campaign that produced the longest stretch of interest rate increases in recent history.

Many economists are predicting the central bank will again hold an important rate steady at 5.25 percent when it meets Wednesday. That would mean commercial banks' prime interest rate _ for certain credit cards, home equity lines of credit and other loans _ would stay at 8.25 percent.

``Households with debt can breathe a little easier as the Fed holds interest rates steady,'' said Greg McBride, senior financial analyst for Bankrate.com. ``If you've been feeling the squeeze from higher home equity payments, credit card payments and other variable-rate debt, the Fed's pause is a chance to catch up.''

The Fed is hoping the economy will slow enough to lessen inflation pressures but not so much as to risk falling into recession. The wild cards in the outlook: energy prices and the housing market's cooldown.

Home construction dropped a bigger than expected 6 percent in August, the Commerce Department reported Tuesday.

The economy, which posted its best growth spurt in 2 1/2 years in the opening quarter of 2006, slowed in the spring and is expected to grow at a pace of around 2.5 percent through the rest of this year.

The jobs climate thus far remains decent, with unemployment dipping to 4.7 percent in August.

And there's been good news on the inflation front. Producer prices edged up just 0.1 percent in August, the government reported Tuesday. Consumer prices rose by just 0.2 percent in August _ half the increase registered in July, the government said last week.

Expectations that the Fed will pause again on Wednesday doesn't mean borrowers' rates will go down, but it gives them time to pay down debt or shop around for a better deal.

For credit card holders, those who have made payments on time have the most negotiating power, experts said.

The average nationwide rate on a variable-rate credit card is now 14.09 percent, Bankrate says. That's little changed from the end of July, which had accounted for the Fed's last interest rate increase at the end of June.

Mortgages rates, meanwhile, have been dropping in recent weeks.

For instance, rates on 30-year mortgages, which had hit a four-year high of 6.80 percent in late July, have been sliding and dipped to 6.43 percent last week, according to Freddie Mac, the mortgage company.

Homeowners who watched their monthly payments shoot up on their adjustable-rate mortgages might consider refinancing into a more secure, fixed-rate mortgage, some experts said.

But others are betting that interest rates will be lower next year. ``If you have the stomach and can take the financial risk, you'd be better off by not refinancing now and wait because in a year or two, the Fed will be lowering rates,'' said Anthony Chan, chief economist for JPMorgan Private Client Services.

Deciding whether to refinance other loans will depend not only on whether people can lock in a better rate but also on their goals.

Borrowers who want to consolidate debt might consider moving from a variable-rate line of credit to a fixed-rate home equity loan, which has a lower average interest rate.

However, people who need money for home improvements may want to stick with a home-equity line of credit.

``I think the focus there is the flexibility it gives you: The ability to dial down the payments if money is tight one month. The ability to only borrow money when you need it,'' McBride said.

For savers, the prospect of rates moving materially higher are slim at the moment, analysts said. ``This is an opportunity to lock in three-year and five-year CDs,'' suggests Kathleen Camilli, president of Camilli Economics.

Jerry Webman, chief economist at OppenheimerFunds, thinks it is wiser to go with a longer term CD rather than a shorter term one, saying, ``The market's best judgment is that interest rates are going to be coming down at the short end.''