Kokomo Tribune; Kokomo, Indiana

Business

December 22, 2013

How Fed's pullback of stimulus could affect you

Cost of home loans may be increasing soon

WASHINGTON (AP) — Consumers will likely pay more for home loans. Savers may earn a few more dollars on CDs and Treasurys. Banks could profit. Investors may get squeezed.

The Federal Reserve’s move Wednesday to slow its stimulus will ripple through the global economy. But exactly how it will affect people and businesses depends on who you are.

The drop in the Fed’s monthly bond purchases from $85 billion to $75 billion is expected to lead to higher long-term borrowing rates. Which means loan rates could tick up, though no one knows by how much.

The move could also weigh on stock markets from the United States to Asia, even though the early response from investors was surprisingly positive.

Just keep in mind: The impact of the Fed’s action is hard to predict. It will be blunted by these factors:

• It’s a very slight reduction. Economists had expected the Fed’s monthly purchases to be cut more than they were.

• Even though it will buy slightly fewer bonds, the Fed expects to keep its key short-term rate at a record low “well past” the time unemployment dips below 6.5 percent from today’s 7 percent. Many short-term loans will remain cheap. “They have tried to sugarcoat the pill,” says Joseph Gagnon, senior fellow at the Peterson Institute for International Economics.

• The Fed thinks the economy is finally improving consistently. An economy that can sustain its strength can withstand higher borrowing rates.

All of which suggests that while Wednesday’s action marked the beginning of the end of ultra-low interest rates, the pain may not be very severe.

The Fed’s bond purchases, begun in the fall of 2012, were meant to stimulate the economy. The purchases were designed to lower mortgage and other loan rates, lead investors to shift out of low-yielding bonds and into stocks and prod consumers and businesses to borrow and spend.

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