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Fed holds off on rate increases

Summary

The Federal Reserve announced no change in the short-term rates that affect credit card APRs and signaled that hikes will start beyond 2014

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The moderate pace of economic improvement means that interest rate hikes — the kind that will boost credit card APRs — remain a considerable way off in the future, the Federal Reserve said Wednesday.

In an announcement capping its two-day meeting, the Federal Open Market Committee reaffirmed its stance on short-term interest rates. The rate-setting committee said it doesn’t expect to start raising the federal funds rate, its chief monetary policy tool, until “well past the time that the unemployment rate declines below 6.5 percent,” a mark economists expect to be reached late this year.

As expected, the rate-setting committee voted to leave its current target for the federal funds rate untouched at a range of 0 percent to 0.25 percent. The rate on overnight loans between banks is closely linked to banks’ prime rate, the benchmark used for setting APRs on most U.S. credit cards. The Fed has kept the federal funds rate — its primary tool for influencing the economy — near zero since 2008 to support recovery.

The Fed’s view of the economy seemed little changed from its December meeting. “The unemployment rate declined but remains elevated,” the committee noted in its statement, taking December’s mixed unemployment report in stride.

Stimulus decision

While the day of reckoning for increases in short-term rates remains in the future, the Fed indicated that the economy remains on track to reach that point sometime after this year. The FOMC announced it would further reduce its purchases of long-term bonds by $10 billion a month, continuing the pullback that began at the committee’s December meeting of extraordinary “quantitative easing” stimulus measures.

The Fed had been buying a mix of Treasury securities and housing-backed bonds to keep long-term interest rates low, a move mainly aimed at keeping mortgage rates low to support the housing sector. In December it announced it would begin cutting back on those purchases  from $85 billion a month to $75 billion, a move known as the “taper.” Wednesday’s announcement further pared the monthly purchases to a monthly rate of $65 billion.

The committee’s decision, coming at the last scheduled meeting of Benjamin Bernanke’s term as chairman, comes against a backdrop of generally improving economic signals, with some notable exceptions. The Labor Department’s monthly jobs report for December shocked some forecasters with a  low 74,000 figure for job creation, roughly half the expected number. Although the overall jobless rate fell from 7.0 percent to 6.7 percent, most of that improvement came from a reduction in people looking for work.  In a research note, TD Economics Senior Economist James Marple called it a “frozen end to job growth” for 2013.

“We did a double take at the payrolls headline … just to make sure there wasn’t a digit missing,” Marple wrote. However, unusually cold weather in much of the country might have caused the blip by chilling construction activity. That means job creation could spring back in coming months as builders make up the downtime.

Given the uncertain job market and extra-low inflation, “monetary policy will remain accommodative well into the future,” TD analyst Sonny Scarfone wrote.

Stubbornly low inflation is also keeping a lid on the Fed’s interest rate stance, indicating there is excess slack in the economy. The December Consumer Price Index came in at a year-over-year increase of 1.5 percent, well below the Fed’s long-term target of 2 percent.

“Inflation has settled in to a fairly benign rate, and is unlikely to change materially in 2014,” Regions Bank Chief Economist Richard Moody wrote in a research note.

See related:Fed starts ‘taper,’ begins weaning off support for low rates

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