Research and Statistics

Fed cuts key interest rate to record low


In what was largely a symbolic move, the Federal Reserve today cut interest rates to their lowest level in history. That decision is not expected to have much impact on annual percentage rates for credit cards.

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See updated story:Fed slashes benchmark interest rate to record low

In what was largely a symbolic move, the Federal Reserve today cut a key short-term interest rate to its lowest level in history. That decision is not expected to have much impact on annual percentage rates for credit cards.

The Fed’s rate-setting group, the Federal Open Markets Committee, cut the target for the benchmark federal funds rate to a range of zero to 0.25 percent in the latest in a string of attempts by the regulator to stimulate lending and prop up the faltering economy. At the conclusion of a two-day meeting, committee members voted unanimously on Tuesday to slash the fed funds rate. Previously, the rate’s all-time record low was 1 percent, hit most recently in October and before then from June 2003 to June 2004.

Today’s action marked the 10th consecutive rate cut. Most recently, the central bank trimmed rates by a half percentage point on Oct. 29. Before the Fed began its campaign of rate reductions in September 2007, the federal funds rate stood at 5.25 percent.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” the Fed said in a post-meeting statement.

The federal funds rate — the rate at which banks lend to other banks — is important because it is used as a benchmark for other rates. Banks set their prime rates, for example, at 3 percentage points higher than the fed funds rate, so as a result of today’s Fed action  it will fall to 3 percent to 3.25 percent. The prime rate, in turn, is the primary index used to set rates on some consumer loans, such as variable rate credit cards and home equity lines of credit.

But today’s action was seen as symbolic because many variable rate cards have already hit rate “floors” below which they will not fall, and lenders are pulling back on, rarely extending, home equity lines of credit. In addition, the flood of money the Fed has poured into the market in an effort to get lending going has had the effect of disconnecting the fed funds target rate from the real rate at which banks lend to each other. The true interbank lending rate is even lower than this record-low fed funds rate, and it has done little to stimulate consumer lending.

Analysts do not expect the Fed’s latest cut to ease average percentage rates for credit cardholders. “Under normal circumstances, a reduction in the fed funds rate should result in lower credit card APRs. However, these are not normal circumstances,” says Ann Owen, an economics professor at Hamilton College in Clinton, N.Y.

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