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Downbeat Federal Reserve leaves rates alone

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The Federal Reserve kept interest rates as-is on Wednesday, as the central bank weighed other options for stimulating a weak U.S. economy.

In the announcement following its latest two-day meeting, the Federal Reserve held its key lending rate at 0 percent to 0.25 percent. That means that credit card holders won't experience the sudden increase in annual percentage rates (APRs) that would have resulted from a Fed rate hike. The latest announcement is nothing new for the central bank: The Fed's key lending rate -- known as the federal funds rate -- has been at that low level since December 2008. The Fed confirmed Wednesday it will keep it that way as the U.S. economy struggles to find its footing.

"I don't expect much impact on consumers," says Greg Daco, senior economist with IHS Global Insight.  

The lack of change in rates doesn't mean the Fed has been idle. Over its prior two meetings, the Fed made some notable announcements. First, the agency committed to leaving rates unchanged through mid-2013. "The reasons are tepid economic growth, an elevated unemployment rate and a distressed housing sector," says Asha Bangalore, senior vice president and economist with The Northern Trust Company in Chicago. Previously, central bankers had only said rates would stay low for an unspecified "extended period." In its last meeting, the Fed instituted "Operation Twist," a plan whose goal is to lower long-term interest rates and raise short-term interest rates, in hopes that lower long-term rates will entice consumers to take out more mortgages and companies to pour more money into their businesses.

Though no new moves were announced on Wednesday, the statement accompanying the decision indicated that many of the Fed's ongoing concerns about the economy remain. "Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated."

'Frustratingly slow' recovery
Additionally, in a post-meeting press conference, Fed Chairman Ben Bernanke acknowledged the central bank's downgraded forecast for economic growth and increased projections for unemployment. "Drags on the recovery were stronger than we thought," he said. 

"The pace of progress is likely to be frustratingly slow," Bernanke said. He explained that although the Fed has already taken drastic actions to boost the economy, unforseen challenges -- such as the tsunami in Japan, the European debt crisis and high commodity prices -- have made economic recovery in the U.S. more challenging. 

Still, Bernanke highlighted the Fed's accomplishments, including keeping inflation low while simultaneously avoiding deflation. That's one half of the central bank's dual mandate to keep prices stable. He acknowledged that the Fed has "fallen short" on the other half of its mission: maximum employment. 

Sudden APR increase unlikely
With the Fed leaving rates alone, consumers shouldn't fear a widespread, sudden jump in credit card APRs. That's because the vast majority of U.S. credit cards have variable rates, which are tied to the prime rate. The prime rate follows the direction and size of changes in the federal funds rate. As a result, when the Fed increases or decreases the fed funds rate, most credit card APRs will track that change almost instantly. Until the Fed decides to raise the fed funds rate, however, any large-scale changes to credit card interest rates are likely to happen more gradually. 

That doesn't mean cardholders are guaranteed safety from higher APRs, however. CreditCards.com's Weekly Rate Report -- which tracks APRs on new credit card offers -- recently hit its highest levels since tracking began in 2007. The national average APR on a new credit card offer reached 15 percent in mid-October, though it has pulled back slightly in the past two weeks.

Also, in a Consumer Reports survey released Nov. 1, 16 percent of respondents said their credit card rate increased on at least one card during the prior 18 months. According to Consumer Reports, the respondents -- who were surveyed in July -- were more likely to see their rates increase if they carried card balances than if they had no card debt and if they had a larger balance compared to a smaller balance. 

The law also has something to say about when cardholders' rates can rise. The Credit CARD Act of 2009 outlines a few exceptions -- including an increase in the prime rate -- that would allow banks to raise a consumer's interest rates within the first year of opening a new card account. For example, if a cardholder lets a bill lapse more than 60 days, the customer's error can trigger a rate increase.

More seasoned cardholders are less protected from rate hikes. Once a credit card account has been open for longer than one year, issuers can raise rates whenever they like -- if they provide the account holder with at least 45 days' advanced warning. Such notice isn't required if the borrower makes a significant borrowing blunder.

Next from the Fed
Although fears of another economic recession have kept the Fed focused on stimulus rather than rate hikes, recent economic news has been brighter. Data showed the U.S. gross domestic product rose 2.5 percent in the third quarter of 2011, marking the most economic growth in a year. 

As a result, the Fed appears content to remain on its current course -- for now. "There are a number of options being discussed now, but there is stimulus that was implemented in the past two meetings" so more isn't immediately required, says Daco of IHS Global Insight. 

Therefore, any stimulus from the Fed "may have to wait until the December meeting or the January meeting, depending on how the economic data comes out" in the interim, Daco says.

See related: A guide to the Credit CARD Act of 2009

Published: November 2, 2011


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