Federal Reserve leaves interest rates unchanged once again
But for the first time in a year, board's decision isn't unanimous
The Federal Reserve once again kept lending rates unchanged on Wednesday, although for the first time in a year, that decision was not unanimous.The central bank's latest decision came at the end of a two-day meeting, with Fed officials voting to leave its federal funds rate at a range of 0 percent to 0.25 percent, keeping the prime rate at 3.25 percent. Variable rate credit cards -- which account for the majority of plastic -- have annual percentage rates (APRs) that track the prime rate. That means when the Fed eventually raises its key lending rate, which it last did in July 2006*, most U.S. cardholders can expect to pay more to borrow on plastic.
But for the first time since January 2009, not all involved agreed with standing pat. The lone dissenter was Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City. He, according to the Fed's statement, "believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."
That note of dissent could signal a small step toward a loosening of the Fed's monetary policy. While the central bank had previously remained united in its decision to keep rates at record lows while the economy recovers, the fact that the latest vote wasn't unanimous could signal that an eventual rate hike could come sooner rather than later.
Huntington Bancorp senior economist George Mokrzan says that depending on economic growth, payroll gains and and increased consumer spending, the Fed could raise lending rates in the second half of 2010. He predicts that, later this year, the Fed will start to "gradually pick the Fed funds rate off the very low floor that it's on now." Still, he cautions that any sustained rate hikes won't take place until next year.
That means for now, the Fed is holding steady. With unemployment currently at 10 percent and sluggish growth keeping prices under control, economists weren't surprised by the Fed's latest decision to hold off on hiking interest rates. "The economy continues to show considerable weakness," and there are no signs that inflation is set to become a problem, says Florida State University finance professor Jeffrey A. Clark.
Fed points to job losses
The Fed sounded an optimistic tone in the first sentence of the statement accompanying its decision. "Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating," the Fed said.
Still, despite that optimism, the Fed recognizes that the labor market is still an issue. "Employers remain reluctant to add to payrolls," the statement said.
With job woes likely to continue, the Fed said it continues to expect the health of the economy to require "exceptionally low levels of the federal funds rate for an extended period."
Banks making moves
Although the Fed left rates unchanged, banks have been taking action. Over recent months, credit card lenders have raised interest rates to levels not seen in more than two years. APRs on new card offers remained at 13.17 percent this week, according to the CreditCards.com weekly rate report, up from 12.04 percent six months earlier.Experts say those higher rates are a reaction to the Credit CARD Act of 2009 -- landmark pro-consumer law which will make it tougher for banks to adjust terms on existing borrowers -- as well as the losses from the weak economy.
Those shortfalls may increase. Moody's latest credit card index showed that although charge-offs -- the amount of unpaid debt banks give up on collecting -- declined somewhat to 10.32 percent in December, high unemployment means charge-offs will likely reach 12 percent to 13 percent during the first half of 2010. That will likely translate to higher rates going forward.
But economists say that the trend will eventually improve. Mokrzan, for one, strikes a tone of cautious optimism. Access to credit cards "could get worse from what it is, but I don't see it on an endlessly worsening path," he says.
*As originally published, this story misstated the date on which the Federal Reserve last raised interest rates. See CreditCards.com's editorial corrections policy.
See related: Banks continue to tighten credit card lending standards, Fed report says, A comprehensive guide to the Credit CARD Act of 2009, Credit card interest rates keep moving higher, Creative new fees escape CARD Act rules, surprise consumers, A guide to the Credit CARD Act of 2009
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