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Cardholders, relax: Fed leaves interest rates unchanged

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Any economists who hoped for something new and exciting during the latest meeting of the Federal Reserve were sorely disappointed Wednesday, after the U.S. central bank opted to leave interest rates unchanged. 

A rate hike from the Federal Reserve this week would've been as surprising as a post-meeting Lady Gaga performance. But alas, there were no monetary policy changes -- or meat dresses -- to be found. 

FED FUNDS RATE, PRIME RATE
STAY AT HISTORIC LOW LEVELS


The prime rate and the federal funds rate have not changed since December of 2008, when the nation was wrestling with the worst of the economic downturn. The Fed had aggressively cut the fed funds rate in the months prior to that as the economy deteriorated. 
 
The chart above shows how far rates have fallen since July 2007 -- just before the recession began. (NOTE: The prime rate, which most credit issuers use in setting credit card rates, is always 3 percentage points higher than the federal funds rate.)

Instead, the Federal Reserve left interest rates at record low levels of 0 to 0.25 percent -- where they have been since December 2008 -- as monetary policymakers wait for clear signs that the U.S. economy has entered full recovery mode. Since the Fed's last meeting in April, no such signs have emerged. Unemployment remains a problem, but the Fed doesn't appear concerned enough about economic weakness to undertake any major steps to stimulate the recovery. Meanwhile, until the danger of price increases due to inflation becomes a more serious worry, the Fed is unlikely to raise interest rates for fear of extinguishing the economy's fire. 

In the Fed's post-meeting statement, it said that interest rates would remain low for an "extended period." The central bank said some areas of the economy were growing more slowly than expected, but was encouraged that "the slower pace of the recovery reflects, in part, factors that are likely to be temporary." The Federal Open Market Committee members voted unanimously on the decision to leave rates alone.

As he did following the previous meeting, Fed Chairman Ben Bernanke held an afternoon press conference where he further discussed the Fed's decision. The Fed chief noted that "extended period" language refers to a wait of at least two to three FOMC meetings, and he downplayed the possibility of a third round of quantitative easing -- purchases of U.S. Treasury securities aimed as reinvigorating the economy -- as the second round nears its end.

Additionally, he offered his own take on the economy. "Personally, I believe the slowdown is partly temporary, and we'll see greater growth going forward," Bernanke said. "At the same time, given that we can't explain the entire slowdown, growth in the near-term might be less than we anticipate."

No news is good news for cardholders
When it comes to cardholders, Fed inaction isn't necessarily a bad thing: According to research firm Synovate, which tracks mailing offers, 99 percent of card solicitations currently have variable rates. As long as the bulk of credit cards continue to charge variable interest rates based on the prime rate -- which the Fed indirectly controls -- most U.S. credit card holders won't see their annual percentage rates (APRs) jump unexpectedly. Although banks are free to raise their customers' APRs independent of Fed decisions, the Credit CARD Act of 2009 generally requires lenders to notify customers 45 days before any rate hikes.

Experts say large banks have a good reason to stick with variable rates, says Anuj Shahani, director of competitive tracking services at Synovate. "For a major issuer like Chase, with a massive portfolio, it would be too much risk to have a big portion on fixed rates" he says. That's because unlike variable rate cards, fixed rates do not fluctuate in response to changes in the prime rate. With variable rates already in place, when the Fed does begin to raise rates, banks will be able to easily pass on higher APRs to customers.

Until then, aside from some exceptions -- including mistakes made by borrowers, such as missing a payment due date by more than 60 days -- most U.S. cardholders won't be experiencing any sudden spikes in their interest rates following the latest Fed decision.

See related: An interactive guide to the Credit CARD Act of 2009

Published: June 22, 2011


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