Research and Statistics

Fed gives cardholders reprieve on higher rates


The Federal Reserve voted to keep a key interest rate at near-zero levels for now

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The cost of having credit card debt will remain stable for now, as the Federal Reserve put off raising interest rates in order to let the economy strengthen further.

The Federal Open Market Committee decided not to tap the brakes on growth, saying the economy is still moving toward full health.

Since its last meeting in April, “activity has been expanding moderately after having changed little during the first quarter,” the rate-setting committee said in its official statement on monetary policy at the end of a two-day meeting Wednesday. The committee voted to keep the federal funds rate — its main lever on market interest rates — at a target range of 0 percent to 0.25 percent. The rate has been at that near-zero level since the end of 2008. “The pace of job gains picked up, while the unemployment rate remained steady,” the statement said.

Economists expect an increase before the year ends, making this a good time to pay down balances on variable rate cards — which is to say, practically all credit cards.

“We look for the Fed to acknowledge the recent uptick in economic momentum with the FOMC likely eyeing a liftoff in September,” TD Economics economist Andrew Labelle wrote in a research note about gains in jobs and retail sales.

“Liftoff” is the term for a long-awaited increase in the federal funds rate. The benchmark rate influences the rates businesses and consumers pay on debt, including credit card balances. Rates on variable-rate cards are set with respect to banks’ prime rate, which historically moves in lock-step with the federal funds rate.

For example, a quarter-point rise in the federal funds rate will very likely bring an equal rise in the interest rate on card balances, starting in the next statement period. The Credit CARD Act of 2009 prohibited most rate increases on your existing balance, but a change in market rates is an important exception. Since the law was passed, card issuers have overwhelmingly switched to variable rate cards, awaiting the inevitable day when market rates move up.

For people who usually carry a balance, the average debt per card is about $7,700, according to 2014 data from the credit bureau Experian. A quarter-point increase in rates will raise the cost of carrying that balance by about $20 year. A quarter-point is only the beginning of expected rate increases, which Fed informal projections say will total about 1.5 percent by the end of 2016.

Economic road map
The Fed had previously signaled that its June meeting would be the earliest at which it might begin raising rates.  But since then, mixed signals from the economy have convinced rate setters to give low rates more time to spur growth.

“The economy hit a soft patch earlier this year,” Fed Chair Janet Yellen said during a press conference following the FOMC meeting.

In economic projections released with the statement, the FOMC cut expectations for jobs and economic growth. The majority of members reduced their expectations for GDP growth in 2015 to a range of 1.8 percent to 2.0 percent, from the previous prediction of 2.3 percent to 2.7 percent in March. And they see unemployment ending the year within a range of 5.2 percent to 5.3 percent, versus the lower 5.0 percent to 5.2 percent predicted in March.

Gross domestic product, the broadest measure of economic health, actually shrank in first quarter of 2015, raising fears that the already-slow recovery has run out of energy. Since then, other measures have been more upbeat, but the jury is still out.

“The consumer is showing signs of life after a lackluster first quarter,” Diane Swonk, chief economist at Mesirow Financial, wrote in a blog post. She commented about retail sales, which surged 1.2 percent in May “as hibernating consumers emerged from their caves.”

The economy is generating jobs, but we still have a ways to go.

— Donald Dutkowsky
Economics professor, Syracuse University

Mesirow predicts growth will return in the second quarter, at a robust pace of 2.2 percent. “That will be enough to get the Fed to achieve liftoff in rates in September,” she added, “but the risk for a delay until December cannot be ruled out.”

The nation’s 5.5 percent unemployment rate looks healthy on the surface, but economists say that the withdrawal of many people from the workforce points to hidden weakness. The 63 percent labor force participation rate, which measures working-age people who either have a job or are looking for work, is at levels last seen in the late 1970s, when women were still shaking off traditional stay-at-home roles.

“The economy is generating jobs,” said Donald Dutkowsky, economics professor at Syracuse University’s Maxwell School, “but we still have a ways to go.”

After the Fed does begin increasing rates, it will probably continue to hold them below long run targets, Yellen said. “The importance of the initial increase should not be overstated,” she said. “The stance of monetary policy will likely be highly accommodative for some time.”

See related:What an interest-rate increase will cost cardholders

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