Cardholders, relax: Fed leaves interest rates unchanged
Any economists who hoped for something new and exciting during the latest meeting of the Federal Reserve were sorely disappointed Wednesday, after the U.S. central bank opted to leave
interest rates unchanged.
A rate hike from the Federal Reserve this week would've been as surprising as a post-meeting Lady Gaga performance. But alas, there were no monetary policy changes -- or meat dresses -- to be found.
|FED FUNDS RATE, PRIME RATE
STAY AT HISTORIC LOW LEVELS
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.)
As he did following the previous meeting, Fed Chairman Ben Bernanke held an afternoon press conference where he further discussed the Fed's decision. The Fed chief noted that "extended period" language refers to a wait of at least two to three FOMC meetings, and he downplayed the possibility of a third round of quantitative easing -- purchases of U.S. Treasury securities aimed as reinvigorating the economy -- as the second round nears its end.
Additionally, he offered his own take on the economy. "Personally, I believe the slowdown is partly temporary, and we'll see greater growth going forward," Bernanke said. "At the same time, given that we can't explain the entire slowdown, growth in the near-term might be less than we anticipate."
When it comes to cardholders, Fed inaction isn't necessarily a bad thing: According to research firm Synovate, which tracks mailing offers, 99 percent of card solicitations currently have variable rates. As long as the bulk of credit cards continue to charge variable interest rates based on the prime rate -- which the Fed indirectly controls -- most U.S. credit card holders won't see their annual percentage rates (APRs) jump unexpectedly. Although banks are free to raise their customers' APRs independent of Fed decisions, the Credit CARD Act of 2009 generally requires lenders to notify customers 45 days before any rate hikes.
Experts say large banks have a good reason to stick with variable rates, says Anuj Shahani, director of competitive tracking services at Synovate. "For a major issuer like Chase, with a massive portfolio, it would be too much risk to have a big portion on fixed rates" he says. That's because unlike variable rate cards, fixed rates do not fluctuate in response to changes in the prime rate. With variable rates already in place, when the Fed does begin to raise rates, banks will be able to easily pass on higher APRs to customers.
Until then, aside from some exceptions -- including mistakes made by borrowers, such as missing a payment due date by more than 60 days -- most U.S. cardholders won't be experiencing any sudden spikes in their interest rates following the latest Fed decision.
See related: An interactive guide to the Credit CARD Act of 2009
- Poll: Lending out your credit card often leads to disaster – Nearly half of Americans who have owned credit cards lent them out to other people. For a third of them, it didn't end well ...
- Poll: 16 million Americans fear stolen cellphone more than identity theft – Experts say personal data theft is a greater danger, but losing your cellphone also has risks ...
- Late payments on cards worsen as balances rise, NY Fed says – Growing card balances are weighing heavier on consumers' budgets, New York Fed report shows, but problems remain low historically ...