Federal Reserve leaves key interest rate unchanged

By Jeremy M. Simon

Despite recent stock market weakness and trouble in the financial sector, the Federal Reserve left a key short-term interest rate unchanged Tuesday.

Rate-setting committee members voted unanimously today to hold the federal funds rate at 2 percent.

Federal Reserve leaves interest rates unchanged
Source: CreditCards.com, Federal Reserve

"The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability," the Fed said in the statement accompanying the announcement.

The first unanimous decision by the Federal Open Market Committee in a year comes during a week in which the U.S. financial sector has been rocked by investment bank Lehman Brothers' bankruptcy filing and Merrill Lynch's purchase by Bank of America. Prior to the announcement, some analysts speculated that the Fed might cut the rate as much as a half-point. However, the Fed chose to leave the rate alone.

Following a round of cuts that began in 2007, the committee last trimmed interest rates on April 30

The latest decision gives banks some flexibility when it comes to annual percentage rates for credit cards. Most consumers with variable-rate credit cards -- and that's most cardholders -- have their rates indexed to the prime rate. Since banks always peg their prime rates to the federal funds rate, the prime rate will also remain unchanged.

Still, even if the Fed had chosen to lower the federal funds rate, major changes to your card's interest rate would have been unlikely in the near future, according to Donald Dutkowsky, professor of economics at Syracuse University.

"I don’t see credit card rates coming down at all in the near-term," Dutkowsky said. "Too many defaults and a basically shaky current financial system lead me to believe that banks are quite wary now of extending credit."

In fact, credit cards rates may head higher, says University of California at Berkeley finance professor James A. Wilcox. "The continuing softening of the economy, the weakness in job markets and the prospect for higher delinquency rates is likely to give a boost upward to credit card interest rates," Wilcox says.

The Fed's subsequent move remains to be seen. "What the Fed will do next depends even more than usual on the actual events that transpire between now and the next meeting," Wilcox says. As for credit card issuers, the question is how high to set their APRs above prime in order to insulate the bottom line from potential losses. "Their real business decision is figuring out what the spread ought to be," he says.

See related: Lower credit limits can hurt consumers' credit scores

Published: September 16, 2008

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