The Federal Reserve raised its federal funds rate a quarter point for the second time this year, meaning higher rates for variable rate credit cards
APRs on credit cards are headed up for the second time this year, as the Federal Reserve ratcheted up its main benchmark rate and signaled that more hikes are on the way.
The Fed announced a quarter-point increase in the federal funds rate Wednesday to keep the hot economy from boiling over.
“Job gains have been strong, on average, in recent months, and the unemployment rate has declined,” the rate-setting Federal Open Market Committee said in its official policy statement after its two-day meeting.
Increases in the federal funds rate translate quickly into higher APRs on most credit cards. That’s because cards have variable rates linked to banks’ prime rate. And banks raise the prime in step with the federal funds rate.
Cost of higher rates hits credit card users
Rate increases are easy to miss on your monthly credit card statement, but if you carry a balance from month to month, they can have a serious impact on your finances.
- Today’s increase of 0.25 percent means an additional $12.50 in annual interest on a typical $5,000 card balance.
- If you pay off the balance over five years, the total interest costs rise by $77.
- Considering this hike is the seventh since the Fed began tightening in 2015, people who carry a balance are already paying substantially more in interest.
- Annual interest on a $5,000 balance has gone up by $87.50 as a result of the Fed rate increases.
Today’s move is the seventh rate increase in this economic cycle, since the Fed began easing up on the economy’s accelerator in 2015. The Fed most recently raised rates at its March meeting.
And there is at least one more rate hike on the way, and possibly two, according to Fed projections released with the rate announcement. A majority of FOMC members predict at least three hikes this year and more are leaning toward four. The Fed statement mentioned rising inflation and economic strength and dropped a years-old line saying the benchmark rate is expected to remain below normal for some time.
“This increase is just another reason why people need to make 2018 the year they really focus on knocking down their credit card debt,” said Matt Schulz, senior industry analyst at Creditcards.com. “The Fed’s almost certainly not finished raising rates, so your debt is only going grow and get harder to pay off.”
See related:Best low-interest cards of 2019
5 ways to offset rising card APRs
Credit card rates are expected to rise after the Fed voted to raise interest rates for the sixth time since December 2015. Here are five actions credit card holders who carry a balance can, and should, take to minimize the cost:
- Pay off, or at least pay down, your balance.
- Create a budget and stick to it.
- Buy time with a balance transfer card.
- Lower your interest rate.
- Get help to manage debt.
Inflation figures show economy is running hot
The move comes a day after new figures came out showing that inflation is running above the Fed’s target of 2.0 percent. The Consumer Price Index for May, the broadest measure of price increases, was up 2.8 percent over the past year, the Bureau of Labor Statistics reported.
However, inflation isn’t so strong that the Fed will have to speed up its rate hike schedule, economists said.
“The build in inflation pressures, at least on the retail level, is more gradual than implied by the 2.8 percent print on headline CPI inflation,” Regions Bank chief economist Richard Moody said in a research note. Housing costs contributed much of the rise in May, while core inflation was a more moderate 2.2 percent over the past year.
“The FOMC was poised to raise the funds rate at this week’s meeting either way,” Moody said.
Rates rise as employment reaches capacity
The job market is running near capacity as well. The jobless rate edged down to 3.8 percent in May, the Labor Department said, as the economy created 223,000 more jobs. As the number of unemployed workers dwindles, employers may boost wages to fill openings – and raise prices to cover the cost.
However, there has been little growth in wages so far, Fed Chairman Jerome Powell noted in remarks after the meeting. “Where is the wage reaction – it is a bit of a puzzle,” he said.
Powell noted that economic growth is strong and inflation is near the Fed’s goal, but repeated that rate increases will continue to be gradual. While inflation has risen, “we’re not ready to declare victory until we sustain that [goal] for some period of time,” he said.
Powell noted that federal tax cuts are stimulating growth. And although there are fears that trade battles could hurt the economy, “we don’t see it in the numbers yet.”
The median expectation for the normal federal funds rate is 2.9 percent – a full percentage point higher than current levels, he said. The normal level is seen as the rate that is neither spurring faster growth or reining it in.