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Federal Reserve leaves interest rates unchanged again

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The Federal Reserve kept interest rates at record lows on Tuesday, once again sparing American credit card holders an abrupt increase in their annual percentage rates.

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 start of the economic downturn. However, in the months prior to that, these two rates -- both of which are tied closely to card APRs -- dropped sharply. 
 
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.)

The announcement, which came at the end of a meeting of the Fed's monetary policy committee on Tuesday, was no surprise. The Fed's key lending rate -- the federal funds rate -- has stayed at a range of 0 percent to 0.25 percent since December of 2008 when the nation was reeling from the start of the economic recession. The Federal Open Market Committee (FOMC) has been reluctant to increase interest rates during what many have dubbed a fragile economic recovery, and there's nothing in Tuesday's release to indicate that has changed.

Why it matters
That's likely good news for consumers. Here's why:

  • The vast majority of American credit cards are variable rate credit cards.
  • Most variable rate credit card APRs are tied to the prime rate. That means that when the prime rate changes, variable rate credit card APRs will, too.
  • The prime rate is 3 percentage points above the Fed's federal funds rate. So when the federal funds rate increases, it sends the prime rate higher, which in turn, leads to an increase in most credit card APRs.
  • When the federal funds rate is left unchanged, as it has been for more than two years now, variable rate credit card APRs don't move either. That means that barring a big mistake -- such as being more than 60 days late in paying your credit card bill -- cardholders won't be seeing any sudden changes to their card APRs. That’s because under the Credit CARD Act of 2009, issuers must give cardholders 45 days' notice for APR changes, except in a few specific cases, including when the changes are prompted by Fed rate movement or by major mistakes by cardholders.

Fed remains cautious about economic recovery
In the FOMC statement, the Fed sounded cautiously optimistic about the economy. "Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," the statement said.

Still, that growth was apparently not enough to warrant a change in rates, given that the Fed said the housing market remains "depressed." The Fed said it is keeping an eye on inflation, whose appearance would cause it to raise rates. It acknowledged the recent spike in oil prices, but dismissed it as a "transitory" problem.

The committee's vote was unanimous.

is Managing Editor at CreditCards.com.

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

Published: March 15, 2011



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