Research and Statistics

Federal Reserve’s rate-hike holiday continues

The Federal Reserve’s three-year holiday from changing interest rates continued on Tuesday, meaning that most Americans won’t have to worry about a sudden credit card rate hike putting a crimp in their shopping plans.


The prime rate and the federal funds rate have not changed since December of 2008, when the nation was wrestling with the worst of the economic downturn. The Fed had aggressively cut the fed funds rate in the months prior to that as the economy deteriorated. 
The chart above shows how far 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.)

The Fed chose to leave its key lending rate — the U.S. federal funds rate — unchanged. The rate hasn’t moved since December 2008, when the world was grappling with the onset of the latest economic recession, and Tuesday’s announcement comes as no surprise. Earlier in 2011, the Fed said that it likely would not raise rates until 2013 at the earliest, in order to let the still-struggling economy find its footing.

Those plans were reiterated in Tuesday’s announcement, which came at the end of a regularly scheduled meeting of the Fed’s Federal Open Market Committee. The FOMC determines the central bank’s monetary policy, or how it controls the country’s money supply.

So why should the U.S. federal funds rate matter to you? Simply put, when the U.S. federal funds rate goes up, most credit card holders will see their card’s APR increase by the same amount almost immediately. That’s because most Americans’ credit cards are so-called variable rate cards.

Typically, these cards’ rates cannot change without the issuer giving you 45 days’ notice of the change. There are exceptions, however. For example, if you’re 60 days or more late with a payment, a bank can boost your APR without the 45 days’ notice.

Another major exception involves a change in the prime rate. Most Americans’ credit cards are tied to the prime rate, meaning that when the prime rate changes, your credit card’s APR will change by the same amount in the same direction almost immediately.

What impacts the prime rate? The federal funds rate. When the fed funds rate changes, the prime rate changes by the same amount.

Add it all up and it means that the Fed’s decisions have a direct impact on your pocketbook. But the good news is that the central bank isn’t likely to increase rates for a year or more.

Still, the Fed did sound optimistic in the wake of recent positive economic news, including a decrease in the national unemployment rate from 9 percent to 8.6 percent. That’s still uncomfortably high in historic terms, but it’s a marked improvement from recent years, which saw the rate creep above 10 percent.

“Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Fed said. The statement said the Fed expects moderate economic growth to continue, though only gradual improvement in employment is likely in the near future, as “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

See related:An in-depth guide to the Credit CARD Act

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