Fed boosts rates another quarter-point
APRs on credit card balances to rise for second time this year
Expert on consumer credit laws and regulations.
APRs on most credit cards are going up for the second time this year, following the Federal Reserve's decision Wednesday to boost its benchmark short-term rate.
The Federal Open Market Committee voted to increase its federal funds rate by a quarter point – to a range of 1 to 1.25 percent. The Fed is on a path to return rates to normal levels from post-recession lows.
Since the rate setting committee's last meeting in May, economic data show that "the labor market has continued to strengthen and that economic activity has been rising moderately so far this year" the FOMC said after its two-day meeting.
"We want to keep the expansion on a sustainable path and avoid the risk that at some point ... we need to raise the funds rate so rapidly that we risk a recession,'' Fed Chair Janet Yellen said in remarks after the meeting.
Banks raise their prime rate in step with the federal funds rate. That in turn triggers higher APRs on variable rate credit cards, which set their rates based on the prime. Nearly all general-purpose credit cards in today's market have variable rates.
The rate hike brings the total increase to 1 percentage point since the central bank began moving interest rates back toward normal in December 2015. Before that, the Fed hadn't raised short-term rates since the pre-recession days of 2006. Since the hike in 2015, the Fed followed with quarter-point increases in December 2016 and March 2017.
Fed to reduce bond
The Fed also announced plans later this year to gradually stop reinvesting in bonds and mortgage-backed securities it has accumulated over the past several years, which could put upward pressure on long-term consumer interest rates such as mortgages. The Fed boosted its bond holdings to about $4.5 trillion since the recession – a strategy it called "quantitative easing" – to hold down mortgage rates and help the housing market. In recent meetings, the committee has discussed letting the bonds gradually expire and be paid back as they reach maturity, FOMC minutes show.
"This will just be something that runs quietly in the background," Yellen said. Changes in the federal funds rate will continue to be the Fed's chief way of influencing economic activity.
What to expect
The Fed's latest boost of its short-term federal funds rate will push banks' prime rate from 4.0 to 4.25 percent. Most variable rate cards, which charge interest based on the prime plus a defined spread, will begin to reflect the higher rate quickly. APRs will go up on statements for this month or next, according to card agreements from major issuers.
Rates on new card offers are already at a high, reaching 15.89 percent Wednesday, according to offers tracked by Creditcards.com's database of 100 widely owned cards. For existing cards, average rates on accounts that are being assessed interest are 13.9 percent, up from about 13.2 percent in 2013, according to the Federal Reserve's report on consumer credit. About 40 percent of credit card holders avoid interest by paying the monthly balance in full.
|Rate impact on credit card users
For people who carry a balance on variable rate credit cards, Wednesday's rate increase means:
The 1 percentage point rate increase since December 2015 means:
What will it cost cardholders?
What will the latest rate hike cost cardholders who carry a balance? For an average balance of about $5,200, a quarter point hike means about $1 more in interest per month. A full percentage point – the hike so far since the Fed began tapping the breaks on the economy in late 2015 – amounts to about $4.30 a month.
"I think the economy is strong enough for a rate hike – but the economy is not very strong," said Robert Frick, economist for Navy Federal Credit Union. While the jobless rate is at a historic low – dipping to 4.3 percent in May – people's paychecks are disappointing.
Can economy pay
Wages are only growing about 2 percent a year, compared to normal growth of 3 to 4 percent. And much of the gains are going to higher-income workers rather than being spread evenly, economists say, leaving most families without an increase in their spending power.
"When real wages go up, all good things happen – people pay their bills on time, the savings rate goes up, confidence goes up," Frick said. "We're not seeing that right now."
In fact, late payments on cards have started to tick upward, and consumers fear more of the same. In survey results released for May, consumers expressed greater fears of missing a future debt payment for the third month in a row.
Frick said the quarter-point hike won't have a large impact on people's wallets by itself. Other factors, such as your credit score, have a bigger effect on the interest rates consumers are charged.
However, variable rate hikes are charged on your existing credit card balance, not just new purchases. That means it becomes more and more expensive just to maintain the same level of debt – putting a strain on households already close to the financial edge.
A 2016 study by credit bureau TransUnion found that about 9 million U.S. consumers are already stretched thin, unable to make more than minimum debt payments. For them, added interest cost nudges them closer to missing a payment – inflicting long-term damage on their credit score.
And as further rate hikes pile on consumers, the squeeze will tighten. "If you look out in the long term, if the (federal funds rate) does get up to 2 percent, 3 percent, then you're going to see a real impact," Frick said.
More rate hikes
A majority of FOMC members expect another quarter-point increase this year, plus three more in 2018, according to projections released Wednesday. The long-range plan is to get the federal funds rate to a "neutral" level of about 3 percent, where it is neither heating or cooling the economy.
But economists say that signs of weakness in the economy might slow the pace of future rate increases. While unemployment is at a 16-year low, lack of growth in wages indicates that there is still slack in the labor market – or else employers would be giving raises to hire and keep workers.
"The probability of additional rate hikes later this year is diminishing," Michael Dolega, senior economist at TD Economics, wrote in a research note. In fact, two fewer FOMC members projected a second hike this year and three in 2018, although that is still the majority's outlook.
The government's report on the Consumer Price Index Wednesday gave Fed-watchers further reason to think that future rate increases will come at a slower pace. The report said prices fell slightly in May, bringing inflation to 1.9 percent over the past year. The Fed's long-range target for inflation is 2 percent a year, as moderate price increases are a sign of a healthy economy.
"Given that prospects for another rate increase this year seem to be weakening, people aren't going to have to worry that much about another rate increase, especially in the near term," Frick said.
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