Following its first meeting of 2011, the Federal Reserve announced plans to keep lending rates at existing levels — which is a good thing for most credit card holders.
|PRIME RATE, FED FUNDS RATE|
REMAIN AT RECORD LOWS
The prime rate and the Federal Reserve’s fed funds rate — both of which are closely tied to credit card interest rates — have been steady since Dec. 18, 2008. Prior to that, however, both rates saw massive drops as the nation dealt with the economic downturn.
The chart above shows just how far the rates have fallen since July 2007 — just before the recession began. (NOTE: The prime rate, which most credit issuers use in setting credit card rates, is always 3 percentage points higher than the federal funds rate.)
On Wednesday, the Fed’s rate-setting committee again maintained its key lending rate — known as the federal funds rate — within a range of 0 percent to 0.25 percent. That decision also kept the prime rate at 3.25 percent. The prime rate is an interest rate index to which most credit card rates in the United States are tied.
For borrowers, an uneventful Fed meeting is often good news. When the Fed raises the fed funds rate, consumers with variable-rate credit cards — which make up the vast majority of current cards and new card offers — see their APRs increase. When the Fed leaves rates alone, as it did Wednesday, APRs for existing cardholders remain static.
The vote Wednesday means if your card rate changes, it’s not the Fed’s fault. Under the Credit CARD Act of 2009, APR changes based on Fed moves can be passed on to consumers. Otherwise, the law limits the conditions under which lenders can raise rates. If cardholders slip up — by going 60 days delinquent on an account, for example — then lenders have the authority to jack up the borrower’s APR. Otherwise, the law requires issuers to provide 45 days’ early warning if they decide to hike rates for another reason.
The Fed has left interest rates at their current historic low levels for more than two years now, and it’s unlikely to boost them anytime soon, experts say. The Fed doesn’t raise rates (or “tighten credit,” in Fedspeak) until the economy is booming and needs to be reined in to ward off inflation. That’s not happening.
“The economy just hasn’t changed. The stock market has gone up, but employment hasn’t,” says Joel Naroff, president of Pennsylvania-based consulting firm Naroff Economic Advisors.
Most members of the Fed’s rate-setting body — the Federal Open Market Committee — aren’t worried about the threat of rising prices, says Michael Brandl, a professor of economics and finance at the University of Texas in Austin. “So don’t look for any tightening for (here is a guess) at least six months,” Brandl says in an e-mail.
Fed up, economy down
Rather than fear rising prices, the central bank remains concerned with the strength of the economic recovery. “The economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions,” the Fed said in the statement accompanying its decision.
With rates unchanged, the FOMC said it will continue buying Treasuries — debt issued by the U.S. government — to bolster the economy. The Fed plans to persist with its purchase of $600 billion in additional Treasuries between now and mid-2011.
Economic data has encouraged the continuation of that approach. “It just reinforces their view that they need to keep the pedal to the metal,” Naroff says.
As it has in the past, the Fed kept its options open, saying it plans to monitor economic indicators as they unfold. “It’s clear the Fed is not going to go to sleep for six weeks, wake up and make a decision” at the next meeting on March 15, Naroff says.
The vote was unanimous. Thomas M. Hoenig, president of the Kansas City Fed, had dissented in all eight FOMC meetings in 2010. However, he is no longer a voting member of the committee, his term having ended on Dec. 31, 2010.