In
2001, we found ourselves in the middle of a recession. The economy
was facing rising unemployment, low growth and shrinking consumer
confidence. The tragic events of September 11th
compounded the unstable state of the economy. These factors led to
a significant drop in interest rates in 2001.
The
Federal Reserve (the Fed) is responsible for containing inflation
and supporting an environment for economic growth. In an effort to
keep the economy moving, the Fed dropped the Fed Funds target rate
an unprecedented 11 times during 2001. The Fed Funds target rate
is the price banks pay for borrowing funds overnight from other
banks or from the Federal Reserve Bank. Those moves resulted in a
40-year low of the Fed Funds target rate at 1.75 percent -- a drop
of 4.25 percent from the prior year!
 Yield
curve steepens
These
decreases resulted in a significant decrease in short-term
interest rates. In the accompanying graph "Treasury Yield
Curves," there is a marked decrease in the one-year and
two-year Treasury rates in January 2002, as compared to January
2001. It was almost a three- percent decrease in the one-year
yields and a 2.5 percent decrease in the two-year yields! Looking
at the graph again, you will notice that long-term Treasury rates
did not see the same drop. In fact, the 10-year and 30-year
Treasury rates are almost unchanged between January 2001 and
January 2002.
Why
is this? Short-term Treasury rates typically move in tandem with
the Fed Funds target rate. Both of these short-term rates
generally reflect current rates of inflation and current growth in
the U.S. gross domestic product (GDP). Long-term rates, on the
other hand, reflect all of the combined buying and selling of
long-term Treasury bonds. Long-term rates, therefore, are not set
by one group, but rather by market consensus.
Looking
ahead
The
economy is starting to show signs of recovery from the recession
of 2001. The gross domestic product (GDP) grew at a 0.2 percent
annual rate for the fourth quarter of 2001. This was a significant
improvement compared to the third quarter’s negative growth rate
of –1.2 percent.
This
growth was partly due to strong consumer spending, especially in
auto sales because of the attractive financing specials offered
late last year, particularly the 0% interest rates. Another growth
factor was decreasing business inventory levels, leading to more
capacity for production and future growth. These key points helped
lead to the January 30th decision by the Fed to keep
the Fed Funds target rate unchanged.
Many
economists agree that it will only be a matter of time before the
Fed begins to raise rates again. Depending on future data, many
have speculated that the increases could begin as soon as the
third or fourth quarter of 2002.
Aside
from the continuing data from the economy, one important factor in
the Fed’s future decisions is the possibility of a stimulus
package from Congress. And at the time of this writing, passage of
such a stimulus package appears remote.
Time
to refinance?
One
thing that is for certain, interest rates will change. Assuming
that the economy is positioned in the normal cycles of growth and
recession, we believe the probability of interest rates rising in
2002 is very likely.
There
is still time to benefit from this low rate environment, however,
but you need to act soon. Once the Fed begins to increase rates,
most interest rates will follow that trend.
1st
FCS offers a variety of products to meet your financing
needs. Your local 1st FCS office can detail options of
how to refinance your loans to take advantage of current rates.
Interest
Rate Options For
interest rate options, visit our Rate Center. Our Rate Quote
lets you request current available interest rates for loans or
leases. Our Rate Alert lets you select a specific interest
rate that you would like us to contact you when it becomes
available. Interested in refinancing a current loan or lease
now or in the near future, our Refinancing Request lets you obtain
available rate and term options.
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