APRs hold steady as Fed opts against rate increase

Upbeat language sets stage for higher rates soon


The federal government's interest rate-setting committee voted to hold rates steady for the fifth time this year, leaving APRs for variable rate credit cards unchanged.

However, the Federal Open Market Committee set the stage for a future rate hike with an upbeat assessment of the economy. The committee's next meeting is set for Sept. 20-21.

Since its last meeting in June, data show that "the labor market strengthened and that economic activity has been expanding at a moderate rate,"  the committee's official policy statement said. "Job gains were strong in June following weak growth in May."

The federal funds rate -- the Fed's chief lever on market interest rates -- will stay at its target of 0.25 percent to 0.5 percent, significantly lower than the 3 percent level considered normal for a smoothly functioning economy.

Banks raise their prime rate in step with the federal funds rate. That in turn lifts credit card rates, nearly all of which are linked to the prime. An increase in the prime raises the cost of carrying an existing balance, as well as the APR paid on new purchases. That makes Fed rate hikes an important pocketbook issue for credit card holders. The monthly cost of carrying a balance rises by $1 for each quarter-point rate hike, based on an average $5,200 balance.

The prime hasn't risen since the Fed raised rates in December 2015. At the end of their last meeting in June, FOMC members projected that rates will climb a half-point by year end, suggesting two hikes of a quarter-point each. The hikes are conditional on continued progress toward full employment in the labor market and long-term inflation of 2 percent, which is a sign that the economy is running on all cylinders.

Many economists are skeptical that the Fed will implement that modest tap on the economic brakes, as economic news buffets policymakers with anxiety about continuing growth. The July meeting was the committee's first since Britain voted to exit the European Union on June 23, rattling financial markets and raising questions about the global economy's continued growth.

Signals from the U.S. economy are flashing green, however, raising the odds of one or two rate hikes by year end. Employers generated a healthy 287,000 jobs in June, indicating that May's dismal job report was a blip, not a trend. And retail sales and inflation both posted robust increases in June.

"While we ultimately don't expect the Fed to rush into further tightening, rising inflation should nudge up the chances that the Fed slips in a rate hike before the year ends," TD Economics economist Neil Shankar said in a research note.

See coverage of previous FOMC meeting: Fed dials back rate-hike expectations


Published: July 27, 2016

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