Fed keeps interest rates low
By Kristie Aronow | Published: July 31, 2013
As expected, the Federal Open Market Committee voted Wednesday to keep short-term interest rates low.
"The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pickup from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate," the Fed's post-meeting statement said.
The committee (the Federal Reserve's rate-setting body) voted to leave the federal funds rate target at a range of 0 percent to 0.25 percent. The federal funds rate is the rate at which banks make overnight loans to each other and has a profound influence on interest rates throughout the economy, including credit cards.
The federal funds rate influences the prime rate banks use as benchmark in setting rates for consumer loans. The prime rate is set at 3 percentage points above the federal funds rate, currently set at 3.25 percent. Credit card companies determine interest rates on variable rate cards based on the prime rate plus an additional markup set by the company.
Most cards in the U.S. are variable rate cards pegged to the prime rate, so if the Fed ever increases the federal funds rate, the prime rate will rise, taking most credit card rates up with it.
The Fed slashed the federal funds rate to near zero in 2009 in an effort to stimulate the U.S. economy, and has left it there at every meeting since, including the one that concluded Wednesday. "We didn't expect it to be a very eventful meeting," said Richard Moody, chief economist for Regions Bank.
The Fed keeps an eye on a variety of economic indicators to gauge whether the economy has healed enough to change rates, and the latest readings, while brightening, give them no reason to move soon. The Fed has signaled it will leave rates alone as long as the unemployment rate hovers above 6.5 percent, with expected inflation not higher than 2.5 percent, which is one-half a percentage point above the Fed's long-term goal.
Jobs are lagging and inflation remains low. July's inflation rate rose to 1.8 percent while unemployment continued to hover at 7.6 percent. "The unemployment rate has been trending down, but we do not forecast the rate to drop to 6.5 percent until the third quarter of 2015," David Nice an associate economist with Mesirow Financial said in an email.
More-positive signals have come from the housing market. It continues to recover, as pending sales in June, though they declined from May, were 10.9 percent higher than the same time a year ago, according to the National Association of Realtors. "The housing market is what they have consistently pointed to as one of the bright spots of the economy," Moody said.
An index of homebuilders' outlook, the Home Builders/Wells Fargo Housing Market Index, also rose in June.
"A more fluid housing market, where prices are appreciating, will help those that were underwater on their mortgage more quickly get their heads above it," Nice said.
In more economic news, the second quarter gross domestic product (GDP) grew at an annual rate of 1.7 percent in the second quarter, up from 1.1 percent in the first quarter, according to the U.S. Department of Commerce. The GDP represents the total dollar value of all goods and services produced in the quarter. In addition, the price index rose only 0.3 percent in the second quarter of 2013, compared with 1.2 percent in the first quarter. Such a low inflation rate continues to provide support for a policy of low short-term interest rates in the near future.
"More and more of the economic tea leaves are pointing in the same direction -- toward a growth revival ahead," said Scott Andersen, chief economist for Bank of the West, in an article from the Washington Post.
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