Fed hikes interest rates for 16th time

By Jeremy M. Simon

The Federal Reserve announced on May 10 the 16th consecutive interest rate hike, directly impacting variable interest rates on credit cards. The rate announcement was based on the federal funds rate, which is the rate the Federal Reserve Banks charge member banks for short term loans. The prime rate moves in lockstep with the fed funds rate and is the more recognized rate since it is the underlying index for most adjustable rate loans.

Federal Reserve Chairman Ben Bernanke expressed hope that the Fed might take a "breather" for a while regarding future rate hike, but didn't rule out continued action to control inflationary pressures in the market. The current fed funds rate is now 5.00 percent, which translates to a prime rate of 8.00 percent.

As a result of the latest prime rate increase, average credit card APRs are 14.18 percent, moving past the 14 percent mark for the first time in many years. Rates have been on the upward move since mid-2004, when the fed funds rate stood at a 40-year low of 1 percent.

For those credit card customers who are currently in an introductory period with low interest or even 0 percent APR, the rate increase is not bad news. At least for now, that is. Unless they can pay down any outstanding balances, the rate increase will be reflected in their regular APR once the introductory period expires.

Regardless of the Fed Chairman's recent hints that a break might be in order, Wall Street pundits are projecting at least another 50 basis points in hikes by the end of Summer. Below is a chart showing the trend line of hikes going back until October of 2004, with future projections through September of 2006.

Prime Rate Trend and Projection

Published: May 20, 2006

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