Feeling the pinch from the Federal Reserve's yearlong campaign to raise interest rates? Chances are you have a home equity line of credit...

Share story

WASHINGTON — Feeling the pinch from the Federal Reserve’s yearlong campaign to raise interest rates? Chances are you have a home equity line of credit or owe money on your credit cards.

But for other borrowers, it’s been a mixed bag. Rates for 30-year mortgages, for example, have gone down.

For savers, rates on a one-year certificate of deposit have risen over the past year, but rates on five-year CDs have barely budged.

“It’s a mixed picture. Short-term rates have climbed from extremely low levels, while long-term rates are at or near historic lows,” said Lynn Reaser, chief economist at Banc of America Capital Management. “This discrepancy in rates has affected borrowers and savers.”

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks.

A puzzled Fed Chairman Alan Greenspan has called the divergence of short-term rates and long-term rates a “conundrum.”

Greenspan and his Fed colleagues are poised to raise their key short-term interest rate, the federal-funds rate, by one-quarter of a percentage point to 3.25 percent when they wrap up a two-day meeting tomorrow. That would be the ninth such increase since June 2004, when the Fed began to tighten credit.

In response, commercial banks are expected to boost their prime lending rates by a corresponding amount to 6.25 percent, which would be the highest since the summer of 2001.

Before the Fed embarked on its rate-raising campaign, the prime rate, used for many short-term consumer loans, stood at 4 percent, the lowest level since 1958; the federal-funds rate, the interest banks charge each other on overnight loans, was at 1 percent, a 46-year low.

Extraordinarily low rates had once been needed to rescue the economy from the 2001 recession, the terror attacks and a wave of corporate scandals that had rocked Wall Street. But the Fed over the past year has been gradually reining in the easy credit, an approach aimed at preventing inflation from becoming a problem while keeping the economy growing.

The average rate on a home-equity line of credit, which is pegged to the prime rate, is now 6.2 percent, up from 4.7 percent a year ago, said Greg McBride of Bankrate.com, an online financial service. Rates on variable-rate credit cards, also pegged to the prime rate, averaged around 13.04 percent in the spring, up from 10.76 percent last year, he said.

For auto loans, though, “we haven’t seen a lot of movement there,” McBride said. The average rate on an auto loan is currently 7.84 percent, versus 7.43 percent a year ago. Increasingly auto loans are getting linked to various Treasury securities, rather than the prime rate, he said.

Despite the Fed’s eight rate increases, a key long-term rate — on the 10-year Treasury note — dropped to 3.91 percent on Monday from around 4.8 percent a year ago. The 10-year Treasury note influences long-term mortgage rates. As a result, rates on 30-year mortgages now stand at 5.57 percent, the second-lowest level recorded this year. A year ago, 30-year mortgages averaged 6.25 percent.

Because long-term rates are low, people can refinance interest-rate sensitive short-term debt and lock in a longer-term rate. “That takes a lot of the burden off consumers,” McBride said.

The interest-rate climate is also a mixed bag for savers, who over the past several years have faced measly returns as interest rates had fallen to extra-low levels.

The average rate on a one-year CD is now 2.76 percent, up from 1.51 percent a year ago, McBride said. But rates on five-year CDs haven’t improved all that much. Those CDs are currently fetching around 3.73 percent, compared with 3.60 percent a year ago, McBride said.

McBride is in the camp of analysts who believe the Fed is nearing the end of its rate-raising campaign. He predicts the Fed will raise rates by a quarter point in August and then order a final quarter-point increase sometime in the fall. That scenario would leave the funds rate at 3.75 percent and push the prime rate up to 6.75 percent.

Some economists say they believe the Fed — faced with uncertainties about the impact of gyrating oil prices — will pause in August and then resume raising rates, pushing the funds rate to 4 percent by the end of the year. That would lift the prime rate to 7 percent. Others predict the funds rate won’t hit 4 percent until next year. Economists say the Fed will stop when the funds rate reaches “neutral,” where economic activity is neither stimulated nor slowed.

Greenspan hasn’t said what constitutes a neutral funds rate. “But we probably will know it when we are there … ,” he said.