The Fed announced today that it was going to keep short-term rates low through the end of 2014.  This announcement should allow for businesses to plan for the future and it should also allow interest rates on long-term mortgage loans to remain low as well.

The policy comes amid mixed signals in the economy.  On the one hand, there are indications that the economy is improving although at a very slow pace.  Typically, there is less manipulation of interest rates when the economy improves.  On the other hand, since the growth in the economy and in the housing sector is not very robust, and since inflation is considered to be at a very low rate right now, keeping interest rates low is designed to be a stimulative tool.  There is a risk that inflation could increase as a result.

Another factor that could contribute to inflation is the Fed policy of QE (quantitative easing), another term for infusing money into the economy.  We have already seen QE and QE2, with indications that QE3 is on the horizon, with the exact timing of the infusion still unknown.

The risk to the economy is that the government may be creating an artificial bubble by its control of interest rates and money supply.  When the free market is allowed to enter into the equation again, we may find that rates increase rapidly and the cost of borrowing to individuals, companies and even the government may be significantly higher.

Think of the consequences for a borrower who has borrowed short-term (or has an adjustable rate loan with periodic rate reviews) and has been enjoying low interest rates.  When the time comes for the loan to be renegotiated or adjusted and rates are higher, the borrower will be facing higher payments than they have been accustomed to.  This situation may create a severe hardship for the borrower to meet their new, higher obligations.  The solution for a borrower is to lock in the low interest rates for the long term, such as the 30-year fixed programs.  This allows them to enjoy the benefits of low interest rates and they will not have to face the uncertainty of what rates may be in the future.

Companies and the US Government do not have the luxury of locking in interest rates for long periods of time.  There was a time when borrowing long-term was considered the prudent thing to do for all the reasons stated above.  In the last 20 years or so, the immediate gratification of lower interest rates was considered more appealing than the certainty that came from longer term borrowing.   The result has been that government borrowing is predominantly in the short-term category and when rates start to move upward, there will be significant increases in the cost of borrowing.

For you as a borrower, now is the time to pay close attention to interest rates and to see if you can qualify for these low, long-term rates.  If there are issues preventing you from qualifying right now, let's work together to develop a game plan to help you take advantage of the savings while the Fed is committed to keeping rates low.