Research and Statistics

Federal Reserve leaves interest rates alone again


The Federal Reserve once again left interest rates unchanged, protecting most consumer credit card holders from sudden increases in their annual percentage rates. But that doesn’t mean the Fed has nothing new to offer.

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The Federal Reserve once again left interest rates unchanged, protecting most consumer credit card holders from sudden increases in their annual percentage rates.

But that doesn’t mean the Fed had nothing new to offer.


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.)

Less than two hours after the U.S. central bank’s decision to leave its key lending rate — the federal funds rate — at record lows of 0 percent to 0.25 percent, Federal Reserve Chairman Ben Bernanke conducted a news conference. During the briefing, Bernanke provided further comment on the Fed’s decision and then took questions from reporters. It’s the first time a Fed chairman has held such an event, and it’s another example of how the Fed’s operations are becoming increasingly transparent — an approach Bernanke said the central bank will continue to pursue.

As for what the Fed’s latest announcement means to consumers, most credit card holders don’t need to worry about sudden increases in the interest rates they pay to borrow on plastic. That’s because the vast majority of credit cards have variable interest rates based on the prime rate, which is typically set 3 percentage points above the fed funds rate. If the fed funds rate was increased by 1 percentage point, for example, most credit card holders would see their cards’ APRs immediately rise by the same amount. The Fed has left its key lending rate unchanged, thereby keeping the prime rate at 3.25 percent.

Banks can increase APRs independent of what the Fed decides, but due to the Credit CARD Act of 2009, they typically must provide customers with 45 days’ advanced warning about any coming rate changes.”They have to give people more notification, but they can still increase the pricing,” says Rodney Tullie, an Atlanta-based certified credit counselor with the nonprofit CredAbility.

That means, aside from some exceptions — including mistakes made by borrowers, such as failing to repay the bank within two months of the designated due date — most U.S. cardholders won’t be experiencing any sudden spikes in their interest rates following the latest Fed decision.

Rates stay low
The Fed’s Federal Open Market Committee (FOMC), which establishes monetary policy, has kept its key lending rate at record low levels since December 2008 in an effort to pump up the deflated U.S. economy. In this statement, its members indicated that “exceptionally low” rates would stay around for “an extended period.”

The Fed characterized the economy as slightly stronger, saying, “The economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.” In theory, low interest rates should encourage lending, which in turn, drives economic activity. When the economy begins to grow, the Fed can opt to raise rates in an effort to curb the inflation that causes higher prices for consumers. For now, though, the Fed isn’t too concerned. “Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued,” it said in the statement. For his part, Bernanke also acknowledged the threat of inflation in his press conference, but downplayed any long-term concerns.

Some experts say that higher prices are already a problem. “You’re getting inflation across clothing, food, fuel — everything but electronics,” says Peter Leeds, author of “Invest in Penny Stocks.” But Bernanke acknowledged the Fed is in a tough spot. “There’s not much the Federal Reserve can do about gas prices, per se” without threatening the economic recovery, he said.

There remains some disagreement over the Fed’s focus on core inflation, which strips out volatile food and energy prices, since those costs certainly matter to the average shopper. “The Fed might tell us that inflation is under control, but you’re going to realize that is incorrect as soon as you get in your car to head home and fill up your gas tank,” Leeds says.

That’s why he believes the Fed needs to act quickly by raising rates in an effort to put a lid on inflation. “Inflation is like fire. It’s easy to put out early, very difficult to put out once it gets going,” Leeds says. Still, he expects that the Fed will definitely raises rates in 2011 — a move that most cardholders who carry a balance will certainly feel.

“When they do get around to raising rates, it will affect anyone with a variable rate credit card,” Leeds says.

See related: An interactive guide to the Credit CARD Act of 2009

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