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Fed stays course on rate hikes at March FOMC meeting

The central bank projects no more rate hikes this year, which could keep card APRs stable


The Federal Reserve opted not to raise interest rates at its March meeting, citing a lack of inflation pressure and continued U.S. job growth. And credit card issuers may not have reason to raise APRs again this year, as the Fed is now projecting no more rate hikes this year.

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The Federal Reserve opted not to raise interest rates at its March meeting, citing a lack of inflation pressure and continued U.S. job growth.

Credit card issuers may not have reason to raise APRs again this year, as the Fed is now projecting no more rate hikes for the rest of 2019. A steady spate of rate hikes over the past three years has pushed the average credit card APR to nearly 18 percent. The rate-setting Federal Open Market Committee’s previous projection in December showed its members expected two hikes in 2019.

In its March meeting, the central bank decided U.S. growth had slowed down from the fourth quarter, warranting no rate hike action. The Fed is also more focused on global risks that could have a fallout on the U.S. economy.

Although U.S. job gains remain strong, inflation is now down as a result of lower energy prices. Besides, consumer spending and business investment spending have slowed down this year, which is also causing the Fed to remain cautious on rate hikes.

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Powell: ‘We’re in a good place right now’

In a related news conference, Fed Chair Jerome Powell noted, “We’re in a good place right now. We will watch carefully as events evolve. And when they do clarify, we will act appropriately.”

The Fed has a positive outlook for the U.S. economy, Powell said, considering that U.S. consumers will have support from the ongoing good job creation. And consumer spending accounts for about 70 percent of the U.S. economy.

However, the global economy remains a headwind for the U.S. in 2019, considering a slowdown in Europe and China, and concerns about any fallout from Brexit, or Britain’s exit from the European Union. U.S. businesses are also concerned about any impact from tariffs.

With the target federal funds rate now at neutral – at a level that neither stimulates nor slows down economic growth – the Fed will “watch and wait” before taking any further interest rate decisions, Powell said. As to why inflation has not risen further, one possible explanation he pointed to is that there is still more slack in the labor market.

“Given a muted inflation backdrop and global economic and financial developments, the Fed expects this period of patience will last into next year,” Leslie Preston, chief economist at TD Bank, said in a March 20 note.

See related: Fear of missing a payment at lowest level in a year, NY Fed says

Could there still be two rate hikes in 2019?

Commenting on the Fed’s policy decision, Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted, “By shifting from expecting three hikes this year as recently as last September to now expecting none, they are very exposed if wage gains continue to accelerate.”

According to Shepherdson, “The Fed, in our view, has put itself into a position where one or more of the external headwinds have to crystallize if the expectation of zero hikes this year is to prove correct. We expect a China trade deal soon, and a turning point in China’s cycle by midyear. We do not expect a Brexit crash-out, and we think Congress will avert the fiscal cliff implied by current spending plans by raising spending in the summer; 2020 is an election year, after all.”

Shepherdson said he expects the Fed to hike rates twice this year – in September and December – despite the FOMC’s adjusted forecast.

“Ultimately, the Fed does what the data dictate; it’s all about wages,” he said.

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Credit Card Rate Report Updated: August 5th, 2020
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