WASHINGTON — The Federal Reserve’s decision to maintain the size of its economic stimulus could be a gift for car and home buyers and for 401(k) accounts.
Yet for savers who rely on interest income, Wednesday’s announcement was a sour one. The Fed also sent an ominous message to job seekers: Hiring and economic growth remain sluggish and vulnerable to further weakening from budget fights in Washington.
The Fed surprised just about everyone by delaying a slowdown in its $85 billion in monthly bond purchases. The purchases are designed to keep long-term loan rates low to spur borrowing and spending. Fed officials had been signaling that they’d likely start reducing their purchases if the economy steadily improved.
But on Wednesday, Fed officials made clear they aren’t yet satisfied with the economy’s progress. Here’s how some could be affected by the Fed’s decision:
Stock investors: Financial markets celebrated the Fed’s delay. The Dow Jones industrials surged more than 1 percent to a record high before retreating slightly Thursday.
It’s no wonder stock investors were ecstatic: The Fed’s purchases could hold down yields on long-term bonds, causing some investors to shift money into stocks in pursuit of higher returns. That money tends to boost stock prices.
Driving up stock prices is part of the plan. That’s because as stock prices surge, Americans who own stocks feel wealthier and more willing to spend. Consumer spending accounts for about 70 percent of U.S. economic output.
Borrowers: The bond purchases benefit borrowers by pushing down long-term interest rates. The yield on the benchmark 10-year Treasury note dropped sharply after the Fed announcement. Rates on mortgages and many other consumer and business loans tend to parallel the 10-year Treasury’s yield.
“It helps people who are looking to buy a house in the near term,” said Gus Faucher, senior economist at PNC Financial Services Group. “It makes housing more affordable. That’s one reason the Fed decided not to act — to make sure the recovery in the housing market continues.”
Savers: The steady pace of the Fed’s bond purchases isn’t going to please savers. Super-low rates have squeezed people who depend on interest income. Americans’ annual interest income fell 11 percent — from $1.36 trillion to $1.21 trillion — between 2008 and 2012, the Commerce Department says.
Rates on saving accounts have become nearly invisible. The annual percentage yield on the average U.S. money market account is 0.1 percent, said Bankrate.com..
Job seekers:: The Fed’s message offered scant hope for people looking for work. Its forecast for economic growth this year is a meager 2 percent to 2.3 percent, slightly weaker than its forecast three months ago. It expects unemployment to remain a still-high 6.4 percent or higher through next year.
Budget impasse: Fed officials have grown concerned that a budget battle in Washington will further damage the economy. Unless Congress agrees to fund the government past Oct. 1, the government will shut down.
Then, next month, the government will reach its borrowing limit. If Congress won’t raise that limit, the government won’t be able to pay all its bills. The risk of a shutdown or default would likely rattle financial markets and could scare businesses and consumers into spending less.
“When there’s all this disruption in D.C., it attacks the confidence of the consumer,” said Frank Sorrentino, CEO of ConnectOne Bank in Englewood Cliffs, N.J.
The reprieve from a pullback in the Fed’s stimulus is temporary. The central bank is still expected to scale back its purchases at one of its next meetings — in late October, in mid-December or sometime early next year.
That is, if the economy has improved by then.
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