Fed leaves rates unchanged again, stays positive about economy
By Jeremy M. Simon | Published: November 4, 2009
The Federal Reserve left its lending rates unchanged again on Wednesday, even as the central bank reiterated that the economy is on the mend.
That central bank decision came at the conclusion of a two-day meeting, with Fed officials voting unanimously to leave its federal funds rate at a range of 0 percent to 0.25 percent, keeping the prime rate at 3.25. Variable rate credit cards -- which account for the majority of plastic -- have annual percentage rates that are set using the prime rate.The Fed led off its post-meeting statement in an upbeat fashion. "Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up," the statement said. They specifically pointed to improvements in financial markets and housing.
In other key portions of the Fed's statement, its language didn't change at all from earlier statements -- for example, when saying that the strength of the economic growth isn't enough to warrant interest rate hikes.The Federal Open Market Committee held the key lending rate close to zero, adding that it continues to expect the health of the economy to require "exceptionally low levels of the federal funds rate for an extended period."
Although analysts had speculated that changes would involve that specific phrase -- possibly in an attempt by the Fed to hint at when another rate hike might be expected -- others predicted that the Fed would continue to be cautious with its wording. That's because central bankers are aware that even slight shifts in their language carries the power to impact equity markets. "They're walking a really fine line here, so they don't want to spook anyone," says Keith Davis, research analyst with Farr, Miller and Washington in Washington, D.C.
The last change to the federal funds rate came in December 2008; as long as the Fed sees inflation as remaining subdued, it will leave the federal funds rate alone and will not be the cause of credit card rate changes.
Fed officials grow antsy
Although the Fed collectively decided to maintain interest rates at their existing levels, some central bank officials appear to be pushing for a change in the near future.
"There are some people -- voting members of the Fed -- that are getting pretty antsy" about hiking rates, Davis says.
These so-called hawkish Fed officials are concerned that higher rates are needed to head off any potential inflation as the economy rebounds. At a speech in Chicago on September 25, Fed Gov. Kevin Warsh -- a voting member of the Fed's monetary policy committee -- indicated that the next change to monetary policy may be "accomplished with greater swiftness than is modern central bank custom." Separately, Kansas City Fed President Thomas Hoenig, who will become a voting member of the policy setting committee next year, told an audience last month that rates should increase "sooner rather than later."
(Note: Presidents of all 12 regional Federal Reserve Banks take part in these monetary policy meetings and can express their views, but they only hold seats -- and thus a vote -- on the Fed's policy-making committee on a rotating basis. The Fed's Board of Governors, including chairman Ben Bernanke and Warsh, are always able to vote.)
"There are some people -- voting members of the Fed -- that are getting pretty antsy" about hiking rates.
|-- Keith Davis
Other officials, however, believe that the Fed shouldn't begin raising rates until the employment situation in the United States improves. St. Louis Fed President James Bullard told Bloomberg Radio that the Fed's key lending rate can only rise after the unemployment rate begins to come down from its lofty levels. "You want some jobs growth and unemployment coming down. That is a prerequisite" for raising rates, Bullard said. In September, the unemployment rate hit a 26-year high of 9.8 percent. Some forecasts predict the jobless rate rose again in October, with those numbers set for release on Nov. 6.
Credit card rates head higher
Regardless of the federal funds rate's lack of movement, credit card annual percentage rates are headed higher. According to CreditCards.com data, the national average APR advanced to 12.64 percent on Oct. 29 from 12.59 percent six months earlier.
"All this stuff leads to the same conclusion for me: credit card rates are going to be higher for borrowers," Davis says.
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