How You Can Take Advantage of the Fed's Low Interest Rate Commitment

Federal Reserve Ben Bernanke Low Interest RatesTwo months ago, the Federal Reserve began a third round of bond buying. Dubbed "QE3," its latest plan to boost the economy hinges on purchasing mortgage-backed securities at the barn-burner rate of $40 billion a month -- nearly half a trillion dollars a year.

Simultaneously, the Fed made Americans a promise: In pursuit of that goal of economic recovery, it will keep buying bonds -- as many as necessary, for as long as necessary, to ensure that the federal funds rate (the rate at which the Fed loans money to banks) is at essentially zero percent "at least through mid-2015."

The objectives here are twofold: First, to lower the cost of borrowing and make it easier for banks to lend, for borrowers to borrow, and for consumers to spend. Second, and corollary: The Fed aims to make interest rates on consumer deposits so low that there's really no point in saving money at all -- so again, you might as well go out and spend it.

How's That Plan Working Out?

Not well, according to a recent study by (RATE). Despite historically low interest rates that discourage saving and encourage spending, 74 percent of Americans polled say they are not, in fact, "inclined to borrow money despite the Federal Reserve's recent pledge to keep interest rates low until mid-2015." Indeed, less than one shopper in four (23 percent) say they're taking advantage of the Fed's low interest rates by borrowing more.

Such consumer sentiment is to be expected. If you think about this from a consumer's perspective -- and after all, we're all consumers here -- what does the Fed's pledge mean to folks who have been assured low interest rates are here to stay?

For mortgage borrowers, Fed Chairman Ben Bernanke's pledge basically means there is no rush to buy a new home today, or even to refinance an existing mortgage, before interest rates go up. Rates will be low for years, so homeowners can feel free to procrastinate.

With Rates Like These ...

As for potential users of other kinds of loan products, the Fed's pledge may actually be operating as a disincentive to spend. After all, if you know that banks are borrowing at near-zero-percent interest rates, and you know the government is committing to keep on giving them free money from here to near-eternity, how fair does it feel to you that these same banks are making you pay through the nose for your credit cards?

According to, the current average interest rate consumers are paying on their cards is 16.89 percent. In contrast, the average interest rate these same banks pay on their interest checking accounts is 0.52 percent. So basically, banks are charging you 32.5 times more to borrow money from them than they're paying to borrow it from you.

As the saying goes: Nice work if you can get it.

What Does It Mean to You?

Despite the unfairness of all the above, it's important for consumers not to miss out on the opportunities provided by the Fed's long-term low-interest-rate pledge. And there are still ways to "work the system" to take advantage of it. For example:

• If it's low bank interest rates that have got you down, do something about it. Rather than settling for a measly 0.5 percent return, put your money in an exchange-traded fund that invests in high-yield dividend stocks. Over the past year, the Vanguard Dividend Appreciation ETF (VIG) has gained 6.2 percent (that's 12 times the average bank interest rate). The Vanguard High Dividend Yield ETF (VYM) is up even more -- 8.8 percent. Remember, such returns are not guaranteed, so this is for long-term money only; any funds you need to access in the next five years (or longer, for the more risk-averse) should not be invested in the stock market. Unfortunately, that means low returns for that short-term cash for now.

• Don't like the 16.9 percent interest rate on your credit cards? Don't pay it! Pay off the balance at the end of every month, and you'll never spend a penny on exorbitant interest charges. And it gets better. While banks have been loath to cut interest rates on their cards, cheap government loans have given them a lot of wiggle room to offer other benefits. Lately, card issuers including Barclays (BCS), JPMorgan Chase (JPM), and Citigroup (C) have been offering "extra points" for new cardholders -- a perk worth $400, $500, or even $600 for anyone savvy enough to grab it and not go into hock when the card comes in the mail.

• Last but not least, mortgages. The Fed's promise to hold interest rates at zero percent for three more years is nice, but remember that promises are made to be broken. Just because one Fed chairman says one thing today doesn't mean another Fed chairman (or even the same one) won't say something different a year from now. In the meantime, a 3.5 percent refinance rate is nothing to sneeze at, especially if you were paying 6.5 percent just a few years ago.

Don't procrastinate. Take the free money now. Heck, if everything goes to pot and mortgage rates drop even more in the future, you can always refinance again.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of JPMorgan Chase and Citigroup. Motley Fool newsletter services recommend Bankrate.

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The amount of cash you can get depends on your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the most cash goes to the oldest borrowers living in the homes of greatest value at a time when interest rates are low. On the other hand, the least cash generally goes to the youngest borrowers living in the homes of lowest value at a time when interest rates are high.

July 15 2013 at 3:42 PM Report abuse rate up rate down Reply
Big John

(the rate at which the Fed loans money to banks) is at essentially zero percent "at least through mid-2015." Hey Ben, that will make eight years at zero percent, why don't you just tell the truth that Bush put the country in a depression.

November 20 2012 at 5:13 PM Report abuse rate up rate down Reply

I thought Bernanke was on his way out................he needs to go along with his boss.
QE-3 will do nothing except make the dollar worth less............Turn on the printing presses is there only fix.
Remember the USA does not have a Money Problem , the USA has a Spending Problem! Throughing money at the fire just makes it grow larger!

November 20 2012 at 1:36 AM Report abuse rate up rate down Reply

This is exactly what makes prices higher and confidence to spend lower is our federal reserve won't raise interests rates to curb speculation which is what causes prices to increase at such alarming rates. This doesn't just go for food this holiday season upon us, but everything else you are paying for too including gas/crude oil which we all know contribute itself to higher prices because someones got to pay the difference, why not the consumer, this is also why jobs numbers are as high as they are too, no confidence in the consumer to spend due to an uncertain economic future resulting from lower returns on savings and investments. This country and the rest of the world are going to go nowhere anytime soon economically until the federal reserve can see this and do something about it soon, quit adding fuel to the fire with our economy, without confidence by the consumer to spend we will go nowhere not just here in America, but the rest of the world too. If it ends up you pay higher mortgage with an increased rate, maybe you need to think of it this way if you know how to manage your money it won't really mean anything because the difference will makeup in higher returns on investments to support higher payments, and then some.

November 20 2012 at 1:11 AM Report abuse +2 rate up rate down Reply

Now is the time to borrow money to make money and/or reduce costs, not to buy wants. Once in a lifetime special and 3 out of 4 people do not see that.....amazing.

November 19 2012 at 11:30 PM Report abuse +1 rate up rate down Reply

This is the dirtiest lowdown trick that they can pull to hurt seniors and savers.

If I am getting say 6% interest, don't you know that I'll be very likely to go out and spend most or all of that? Now that's s consumer stimulus.

It's not working. Try something different. The definition of insanity is to do the same thing over and over and expect different results!

Somebody's got their hand in the till here.

November 19 2012 at 6:07 PM Report abuse +4 rate up rate down Reply

spend every last dollar on sex and drugs

November 19 2012 at 5:52 PM Report abuse -1 rate up rate down Reply

Better yet, increase interest rates to at or near 5.5% to curb inflation and speculation going on causing record high prices at the pump, which in return reflect alot of what consumers pay on everything else they buy, with rates this low and prices at where they are today you won't find consumer confidence at a level that increases spending anywhere which is only going to keep job numbers and unemployment at where they are today. No healthy economy has interest rates at 0% the longer we keep rates at these levels you see today the more contraction the economy will have later. If all you can afford is 0.0% in interest when you borrow money, then you shouldn't be doing it in the first place, learn to live with in your means America, don't spend what you cannot budget for or pay back with your level of income. Until the federal reserve can see this, our economy will be in the shitter for years to come.

November 19 2012 at 3:02 PM Report abuse +4 rate up rate down Reply

"The Fed aims to make interest rates on consumer deposits so low that there's really no point in saving money at all"


Folks, it's time to break out the pitchforks and torches.

November 19 2012 at 12:23 PM Report abuse +4 rate up rate down Reply
1 reply to rickpetersonms's comment

Hate to tell you, I agree with you 100%, but Sheeple can't carry pitchforks and torches.

November 19 2012 at 9:01 PM Report abuse -1 rate up rate down Reply

Your advice about dealing with our historically low interest rate climate is fine except that there is more to the story. The returns on high dividend paying companies, either individually or through an ETF or mutual fund, can be tempered, reversed or even far outweighed by potential declines in the equities of the firms paying these dividends. If an investor chooses this type of investment, either because they do not want or cannot afford to take equity risk, this risk has not been eliminated. If they earn a 3.5% annual return on dividends, for example, but the stocks decline on average by 5%,10% or more in the same period, their dividend returns have been more than erased and a meaningful amount of principal - principal that is expected to, or must, generate an income strream, can be lost. Many retirees, others living on a fixed income and those trying to outlive a nestegg, i.e., people who, in many cases, cannot tolerate equity risk, suffer the most from our current interest rate environment. Inflation, which is relatively low at present, makes today's returns of near zero, net negative. Moverover, if there is meaningful inflation in our future, as many argue will result from the Fed's relentless money printing, these same groups will be hurt yet again, and this assumes that Social Security and Medicare benefits will not be reduced down the road. Pensions and Social Security will almost certainly not keep pace and these invvestors risk falling victim to spiraling prices.
Ken Jingozian

November 19 2012 at 11:10 AM Report abuse +2 rate up rate down Reply