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Latest Fed statement offers little relief to credit cardholders

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The latest Federal Reserve announcement provided little fresh support to cardholders hoping for a break from higher interest rates and fees.

Federal Reserve policy announcement

In an announcement at the conclusion of a two-day meeting, the Fed today voted unanimously to leave its federal funds rate at a range of 0 to 0.25 percent, keeping the prime rate at 3.25. Noting that "the economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Federal Open Market Committee struck a tone of cautious optimism but also reiterated a commitment to using any means necessary to bolster the economy.

"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the Fed said in a statement.  

That lack of clarity on the Fed's part wasn't surprising. According to analysts, the Fed remains in wait-and-see mode in regards to stimulating credit card lending. Having already used traditional monetary policy to cut interest rates to essentially zero, the Fed more recently turned to a nontraditional approach, purchasing billions in Treasury securities and instituting the Term Asset-Backed Securities Loan Facility (TALF) in an effort to spur credit card lending. That leaves the central bank with few options. "I don't see what's left," says Dennis Moroney, research director at advisory services firm TowerGroup in San Antonio. "Monetary policy is pretty much exhausted."

The Fed today reiterated its approach to buying Treasuries and mortage securities. Still, some analysts remain unconvinced the the recent moves are having much of an impact. "They have a lot of programs out there, but I don't think they are doing a whole lot of good," says Tony Plath, professor of finance at the University of North Carolina at Charlotte. Plath adds that the Fed needs to provide an update on how initiatives like TALF are working, and if they aren't, what the Fed can do to get them working.

"The next time the Fed tells me how badly they want banks to lend, my question is: How?" asks Plath.

Meanwhile, banks are dealing with regulators' demands for more accommodating credit card terms."They have this historically profitable area in credit cards, and a lot of that has to do with fees," says Keith Davis, research analyst with Farr, Miller and Washington in Washington, D.C. "Now they can't rely on that as much because the regulators are breathing down their necks." Other experts agree. "A healthy TALF would add liquidity to consumer lending markets. Real risk to credit markets comes from potential legislation limiting rate changes," says Robert A. Dye, senior economist with PNC Financial Services Group in Pittsburgh, Pa, via e-mail.  

Nevertheless, ahead of any regulation, cardholders have seen terms becoming more unfavorable. That's because banks need to make money any way they can. "They want to raise rates and fees not only because the credit backdrop has gotten worse -- they need to charge for risk -- but they are looking at credit cards as a way to make up for losses elsewhere," such as in mortgages, Davis says. Additionally, banks are hiking rates ahead of regulations that could eventually limit their ability to do so. "A lot of the issuers are trying to re-price under the wire," says Moroney.

Cardholders haven't exactly welcomed that approach. "You can't pick up a paper or turn on the radio without hearing someone complaining about their rates going up," Moroney says.

Credit card interest rates have increased, in spite of the Fed's consistent monetary policy. In its meeting concluding Dec. 16, 2008, the Federal Open Market Committee unanimously voted to cut the target for the benchmark federal funds rate to a range of 0 percent to 0.25 percent. The rate has not changed since.

Previously, the rate's all-time record low was 1 percent, hit most recently in October 2008, and before then from June 2003 to June 2004. Prior to the Fed's campaign of rate reductions in September 2007, the federal funds rate stood at 5.25 percent.

For the time being, cardholders should continue to expect those unwelcome APRs and fees. "Terms, in general, are getting a little more onerous on the cardholder, and they probably will continue to as long as the regulatory backdrop allows it," Davis says.

See related: Credit card users beware: Terms, they are a-changing

Updated: April 29, 2009


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