Fed holds course but rate hike draws nearer
Variable rate credit cards will hold their APRs steady a while longer, as the Federal Reserve decided Wednesday that the slow-growing economy still needs support from cheap money.
The Federal Open Market Committee announced it voted to hold its benchmark federal funds rate between 0 and 0.25 percent, to maintain support for the economy's brightening picture. However, the tone of the statement did nothing to contradict expectations of a rate hike in September.
"The labor market continued to improve, with solid job gains and declining unemployment," the FOMC official policy statement said at the end of the committee's two-day meeting.
When it happens, the Fed's "liftoff" from near-zero rates will boost the APRs that most people pay on their credit card balances. An uptick in the federal funds rate means a similar increase in banks' prime lending rate, which is the cue for variable rate cards to go ahead and increase their APRs by the same amount.
The expected amount of a rate increase, one quarter of 1 percentage point, isn't likely to break many budgets. The added cost on a $2,500 balance, for example, would come to $6.25 a year, or 52 cents per month. But the hike may come as a surprise to cardholders who have not seen a rate increase based on market forces before. Variable rate cards largely took over the card industry after the Credit CARD Act of 2009 gave them a limited exemption from rules against rate hikes on existing balances. The Fed's rate increase -- when it happens -- will be the first since 2006.
Since the rate-setting committee's last meeting in June, the economy has showed little sign of pulling out of its lethargy and marching toward the Fed's vision for a robust job market. Recent figures on unemployment and retail sales fell short of analysts' expectations. But the FOMC statement's tone contradicted analysts' concerns that the recent figures could cause the Fed to extend the countdown to liftoff.
"If anything, the exodus from the labor force and lack of wage gains ... may lead the FOMC to re-evaluate its estimates," TD Economics Senior Economist Michael Dolega wrote in a research note before the FOMC meeting.
The unemployment rate did shrink to 5.3 percent in June, from 5.5 percent. But a 432,000 decline in the labor force -- the number of people working or looking for work -- was a big part of the reason, according to the Labor Department's monthly look at the job market. Many economists are knitting their eyebrows with concern at the shrinking labor force, and the FOMC doesn't base its opinions about the health of the job market on the jobless rate alone.
"The broader message from the labor market remains the same," Regions Bank Economist Richard Moody wrote in an analysis; "further progress, but with much longer to go before the labor market could be considered fully healthy."
Another sign of weakness from the economy emerged in June's retail sales, which fell 0.3 percent for the month -- on top of a downward revision to May's retail take. "This was unequivocally a disappointing report," TD Economics Economist Thomas Feltmate wrote in an analysis. With the Fed's September meeting drawing closer, "we are going to need a decisive turn in underlying economic momentum very soon if a September liftoff is still going to happen."
See coverage of previous Fed meeting: Fed gives cardholders reprieve on higher rates
Published: July 29, 2015
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