If you’re an average wage earner with a fixed-rate mortgage and a couple thousand to put into savings, you may be feeling left out by the financial gyrations of the past week.
No one offered to take over your payments, and when you went to the bank the yields on certificates of deposit made you gulp – the average one-year CD is down to 2.33 percent, according to bankrate.com, from 3.76 percent in September, when the Federal Reserve began slashing interest rates in the hope of breaking the economy’s fall.
Oh, and inflation – fueled in large part by a swooning dollar – is rearing its ugly head in the cost of everything from gasoline to slacks.
That may lead to a belief that the Fed and other government institutions are more interested in bailing out reckless billionaires than in helping ordinary Americans stay solvent. There’s no doubt that lower interest rates can hurt people who depend on fixed-income investments, especially if the CD they bought a few years ago when rates were high is coming due. You’re also on the wrong side of the equation if you’re shopping for a fixed-rate mortgage, because those rates are less affected by Fed action that is focused on very short-term lending between financial institutions.
But take heart; things could be worse, says Robert H. Graham Jr., president of Riggs Asset Management in Wilkes-Barre.
“When things go bad it always gets worse for the smaller person,” Graham said, and he used a term even scarier than the “R” word. “What you were seeing was a seizure of the financial credit markets” that he likened to 1929-1932. “That’s really what we’ve seen in depressions.”
Graham explained that when the credit tap is closed businesses can’t get money to buy inventory, or perhaps even to make payroll, and banks become reluctant to lend, which shuts out borrowers with less than stellar credit while raising interest rates.
That may make tepid CD rates a little more palatable, particularly in comparison to the situation for Bear Stearns employees who saw a lifetime of wealth evaporate over a weekend.
What to do? Graham suggests sticking with short maturities for now, because those inflation pressures are likely to force rates higher before long. If low-risk investing is your bag, lock in longer terms once rates climb back to respectable levels.
Misericordia University economics honcho John Sumansky agrees that everyone is sharing the pain right now, and says it will take a while for things to get better. Not that long, though: “It’s coming back,” he guesses, in the next six to 12 months. “I think we’ve heard the worst of it already.”
For now, find “the safest place to park the money for the time being,” he suggests. And if your job is secure and you have good credit, “go out and buy a house.”
Whether we’re comfortable with it or not, both Graham and Sumansky say the modern world, from charge cards to international business mergers, runs on credit. Greasing the bound-up credit markets helps both lenders and borrowers have confidence in the other’s ability to perform, and confidence is the ultimate currency.