Fed puts off interest rate hike


Variable interest rates on credit cards will hold steady for the time being, as Federal Reserve rate setters refrained Thursday from boosting a key rate amid concerns about the economy.

Since the Federal Open Market Committee met in July the U.S. economy continued to improve, the committee said, but global economic turmoil raised concerns.

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term," the FOMC said Thursday in its official policy announcement at the end of its two-day meeting.Stock markets in the U.S. and elsewhere plunged in August over concerns about slowdowns in China and developing nations.

The committee opted to leave the federal funds rate at its current range of 0 to 0.25 percent. The vote delays the beginning of a potentially painful cost increase for people who carry debt, including balances on variable rate credit cards.

The Fed should not be responding to ups and downs in the markets, but when there are significant financial developments, it's incumbent on us to ask what is causing them.

-- Janet Yellen
Federal Reserve Chair

However, three-quarters of committee particpants think that the first "liftoff" rate hike should occur before year end, according to projections released with the policy statement.

Most FOMC members took a rosier view of the future job market, but downgraded their expectations for economic growth. The median projection for unemployment at the end of 2016 was 4.8 percent, improved from the previous 5.1 percent projection in June. But expectations for the rise in 2016 Gross Domestic Product fell to 2.3 percent, from 2.5 percent.

Most card APRs are linked to banks' prime rate, which moves in step with the federal funds rate. Adjustable rate auto loans, home equity lines of credit and personal loans also take their cue from the prime rate, which is currently 3.25 percent.

When the FOMC does hike rates -- which analysts expect in December or early 2016 -- APRs on existing card balances will also go up, with little delay. Most variable rate cards can adjust their rates in the same billing cycle that benchmark rates rise, or the following cycle.

A quarter-point increase in the federal funds rate and prime rate will translate into an extra $13 in annual interest costs on average consumer's card balance of about $5,234, based on Fed figures and credit report statistics. Rate increases on an existing balance are generally off-limits, but variable rate cards that follow changes in market rates are an exception.

The first rate hike has been predicted and pushed back so often, beginning this past spring, that Fed announcements have been compared to the film Groundhog Day, in which Bill Murray's character relives the same day over and over. The federal funds rate has stuck at its current near-zero level since the end of 2008, and hasn't seen an increase since mid-2006.

But some analysts stress that the pace of increases will be more important than the timing of the first quarter-point step, which will have a relatively slight impact by itself. 

"The most important thing I think is how quickly they're going to raise rates -- and the answer to that is, not very quickly," said David Nice, Economist at Mesirow Financial. He expects the Fed to avoid predictable quarter-point hikes in each meeting, which was the pattern in other increase cycles, in favor of more gradual monetary tightening.

A majority of FOMC participants expect the target federal funds rate to remain below 1.75 percent next year and below 3 percent at the end of 2017, according to projections released with the statement. 

"The importance of the initial increase should not be overstated," Fed Chair Janet Yellen said in remarks to reporters following the meeting. Even after the first hike, the Fed is likely to keep interest rates below historical norms for some time in order to spur the economy.

Economic headwinds
With an unemployment rate of just 5.1 percent, the job market looks healthy on its face, but vital signs are mixed. The number of part-time workers remains high, and job growth is anemic and narrow, economists say. A pickup in jobs in August came entirely from services, while factories actually shed 17,000 jobs.

"Clearly, the combination of a stronger U.S. dollar and weaker global growth environment is pressuring domestic manufacturing," Regions Bank Chief Economist Richard Moody said in an analysis.

The U.S. dollar has risen in value compared to foreign currencies, making imported goods cheaper. This puts the Fed in a bind, because raising rates would make the dollar even stronger, potentially undermining U.S. factories and their jobs.

The Fed's mandate is to maintain optimum employment with low inflation, so it isn't concerned directly about the stock market. But a harrowing plunge in stock prices in August reflected global economic worries that affect important U.S. trading partners.

"The Fed should not be responding to ups and downs in the markets," Yellen said, "but when there are significant financial developments, it's incumbent on us to ask what is causing them."

Inflation is low -- not a bad thing if you're at the grocery store, but another indicator of a slow-running economic engine. The Consumer Price Index actually fell in August, and prices for the past 12 months are up just 0.2 percent. Consumers are benefiting from lower fuel prices, but deflation -- when prices fall across the board -- would be too much of a good thing.  Producers cut output -- and jobs -- - when prices fall for the goods they make.

"However, as the headwinds from a higher dollar and lower energy prices begin to abate, inflationary pressures should begin to turn higher," TD Economics Economist Thomas Feltmate wrote in an analysis, "giving the FOMC the confirmation they need to take interest rates off the floor in the near future."

See coverage of previous FOMC meeting: Fed holds course but rate hike draws nearer


Published: September 17, 2015

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