Credit card users were spared higher APRs for now, but should brace for an increase before year end
Credit card APRs will stand pat for the time being, as the federal government’s interest rate-setting committee voted Wednesday to delay raising rates for the sixth time this year.
The vote means the federal funds rate — the Fed’s main lever on interest rates banks charge — will stay at its target of 0.25 to 0.5 percent. The committee considers 3 percent to be the normal long-run rate for an economy in which growth and inflation are in balance.
“The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives,” the Federal Open Market Committee’s official policy statement said.
However, projections released Wednesday by FOMC members indicate the odds of future rate increases are growing stronger. Fourteen of the committee’s 17 members project rates should rise at least a quarter point by the end of the year. Three members voted against delaying the rate hike at this month’s meeting, an unusually large number of dissenters. The Fed’s last rate increase was in December 2015.=
“Most participants do project an increase would be appropriate this year,” Fed Chair Janet Yellen told reporters after the meeting. “And I would expect to see that,” she added, barring a downturn in the labor market or new global economic shocks.
The Fed has just two meetings left to raise rates in 2016. The next meeting is set for Nov. 1-2; however, the committee is not expected to act so close to Election Day (Nov. 8). That makes the Dec. 13-14 meeting the most likely date for a rate hike this year — in time to raise interest costs on card balances swollen by holiday spending. Yellen would not rule out a rate increase at the November meeting, saying the Fed’s monetary policy is insulated from politics.
Credit card rates are tied to the federal funds rate by banks prime rate. Adjustable rate loans — including nearly all credit APRs — rise and fall with the prime rate, which mirrors changes in the federal funds rate.
Even a small, quarter-point increase in rates will impact millions of consumers, according to a recent study by the credit bureau TransUnion. About 92 million Americans have adjustable rate loans that will become more costly, the study found. Of them, about 9 million will face difficulty paying the higher monthly bills, as they are already struggling to make minimum payments.
The average cost of the rate increase for those affected is about $6.45 a month, the study found. However, some consumers will face added costs of $50 or more a month.
Economic signals mixed
Yellen said that while the jobless rate has improved, more people are entering the labor force, indicating that job creation needs to absorb the sidelined workers before wages and salaries can rise. The U.S. unemployment rate was 4.9 percent in August, unchanged for the month as payrolls grew by 151,000 jobs.
“We’re struggling with a difficult set of issues — what is the new normal in this economy and in the global economy generally,” Yellen said. The moving target for job creation has prompted the FOMC members to dial back their earlier projections about how quickly to raise rates.
However, “we don’t want the economy to overheat and significantly overshoot our 2 percent inflation objective,” she added. Inflation, as measured by the Consumer Price Index, ran at an annual rate of 1.1 percent in August, somewhat higher than analysts predicted. Core inflation, subtracting volatile food and energy prices, was at a 2.3 percent rate.
Yellen strongly denied charges that the Fed is keeping rates low to support the Obama administration politically. “Partisan politics plays no role in our decisions about the appropriate stance of monetary policy,” she said in response to a reporter’s question. “We do not discuss politics in our meetings and we do not take politics into account in our meetings.”
See previous FOMC meeting coverage: APRs hold steady as Fed opts against rate increase