The Federal Reserve has started its big, two-day meeting, and on Thursday will make its latest announcement on interest rates.
With rates near zero for so many years, who’s benefited? Basically, it’s been borrowers.
We’re talking about people like 36-year-old Drew Wood of Minneapolis and his wife, Vanessa. They have two kids, a Boston terrier and a very low interest rate on their mortgage.
Drew Wood with daughter Matilda.
“It was like, basically December 2012 that we bought this house — that was when we closed at 3.125 percent,” he says.
That’s right — he said 3.125 percent, about half the interest rate on the mortgage for their first house, which they bought just three years earlier and had soon outgrown.
Wood says the low interest rates were like a springboard, giving them an incentive to move to a bigger house a bit sooner than they’d planned. Oh — and along the way? Their bank sold their student loan, and they got a nice surprise.
“Actually the payments have gone down a little bit,” Wood says. “It has to be because of interest rates. I don’t know what else I can attribute that to. It’s not like, when it got sold, those guys where like, you know what? We’ll take a little bit off the top. You owe us less.”
Wood and his family aren’t the only ones paying less on loans. In Silicon Valley, it’s easier than ever for tech startups to borrow or raise money. Low interest rates have driven investors to make riskier deals, hoping for better payoffs than they get from anemic savings accounts. Investors are almost throwing money at entrepreneurs.
“That fear of missing out is driving a lot of very aggressive, competitive behavior where people are competing tooth and nail to get in these projects,” says Scott Raney, a venture capitalist in San Francisco and partner at Redpoint Ventures.
But even if people aren’t throwing money at you, you are benefiting indirectly. Low interest rates have saved the government – and taxpayers — a lot of money. Lower borrowing costs have brought down the federal budget deficit. Even a school district that borrowed, say, $5 million on the bond market could save big.
“Let’s say they were able to save 1 percent per year on the borrowing,” says Ernie Cecilia, chief investment officer at Bryn Mawr Trust Company. “That would be a savings of $50,000 on a $5 million bond issue.”
Basically, if you borrow big when interest rates are low, you save big. But not everybody can do that. Jeffrey Dorfman, an economist at the University of Georgia, says low-income Americans don’t usually own homes. They tend to borrow money through payday loans or credit cards.
Wood stands in front of his Minneapolis house.
Dorfman says rates on credit cards are down 15 percent. But mortgage rates have fallen 40 percent.“The interest rates on both of those have not particularly been affected by the Fed’s interest rate policy,” he says.
“So poor people are still paying a lot of interest in order to get access to some money,” he says.
Dorfman says by keeping interest rates so low for so long, the Fed has widened the wealth gap in the U.S. He’s been calling on the Fed to raise interest rates to level the playing field. We’ll find out soon if the Fed was listening.
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