What Rock-Bottom Interest Rates Mean for Consumers

In an unprecedented move on Tuesday, the Federal Reserve said definitively that historically-low rates are here to stay until at least mid-2013, essentially eliminating the possibility of a hike in interest rates for the next two years.

While stocks reacted favorably to the news -- the Dow soared 429 points -- determining the impact of extraordinarily low interest rates for the next two years from a personal finance perspective is a bit more ambiguous.

On the one hand, the Federal Open Market Committees decision to keep rates low for more than just an extended period -- as it has previously stated -- is an indicator the Fed expects the economy to remain sluggish. That could mean we will see continued high unemployment, low consumer confidence and slow economic growth, all factors that do not give one much impetus to borrow and spend money.

On the other hand, it has never been cheaper to borrow money; if you can qualify for a loan, now (or sometime before mid-2013) is the time to get one. But personal finance experts caution against making any purchasing decisions based on interest rates, warning consumers its important to keep the bigger picture in perspective.

I certainly wouldnt be basing my decision to buy a car, a house, or take out a loan because interest rates are going to stay low for a couple of years, said Erik Carter, a certified financial planner with Financial Finesse, a Los Angeles-based financial education firm. Really, its about focusing on your goals, focusing on the fundamentals and not being distracted by what the Fed is saying today.

Carter said if it makes sense for you to buy a car, consolidate student-loan debt, or refinance your mortgage, now is as good a time as any with these historic rates, but major spending decisions should be made based upon your current financial picture, not the federal funds rate.

The fact that we know rates will be low for the near future is a positive thing for consumers who are looking to buy a home or refinance, according to Paul Bishop, vice president of research for the National Association of Realtors. He continued to explain that fear of rising mortgage rates is not really the primary concern weighing on borrowers. For most consumers, its high lending standards, not interest rates, that are holding them back.

Its really the availability of mortgages at this point that is a problem for consumers, Bishop said. Underwriting standards are fairly strict and are likely to remain that way for some time.

Still, knowing we will see two more years of low interest rates is not a bad thing for prospective home buyers, who can work to improve their credit without feeling they might miss out on an historic deal. For those with good credit, Bishop reiterates that it is tough to beat flat housing prices and rock-bottom interest rates, if you are considering the purchase a home.

From a retirement perspective, a protracted period of depressed rates means socking money away into the standard high-yield savings account is not going to cut it. Mark Singer, a certified financial planner and author of The Changing Landscape of Retirement, said most conventional investment strategies can not satisfy most investors goals anymore.

Eighty percent of the money invested in 401(k)s is in equities -- theyre getting crushed, and are moving from one headline to the next, Singer said. You cant use the traditional stocks, bonds, cash and mutual funds formula anymore, you have to use alternative investment classes. He continued to cite managed futures, long/short funds and market-neutral strategies as better alternatives.

Singer explained that for people nearing retirement that have hit their target retirement number, or the amount of money they can live comfortably on in retirement, they need to take low-risk strategies to maintain that number against inflation. For those who have not yet reached their retirement goals, Singer advocates carefully evaluating how much risk you need to take in order to reach the target, but warns against putting a lot of money in the market and investing everything in bonds, regardless of where interest rates stand.

The idea of the Fed giving us a more transparent outlook as to how interest rates will look for the next two years may be atypical, but there is nothing stopping the committee from changing its strategy in a few months if the economy were to suddenly stabilize. In light of that, Carter reiterated consumers should not alter their fiscal picture much from what they were already planning on the spending or saving front.

You have to keep it in perspective -- the fundamentals are the same, Carter said. Youre always trying to earn as much interest as possible and pay as little interest as possible.

In other words, act in your own best interest, regardless of interest rate levels.