Research and Statistics

Fed: Countdown to higher rates continues at ‘patient’ pace


Interest rate setters at the Federal Reserve signaled that near-zero market rates are approaching an end, but they’ll not be rushed

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The countdown continues toward a liftoff of higher interest rates in 2015, but at a measured pace, the nation’s chief rate-setters signaled in their official statement Wednesday.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” the Federal Open Market Committee announced at the conclusion of its two day meeting Wednesday, its last scheduled meeting of the year.

The statement makes a more direct reference to the interest rate increase looming on the horizon than previously, while also making it clear that the countdown is not speeding up. The new guidance is “consistent with its previous statement” calling for near-zero federal funds rates for a “considerable time,” the FOMC said.

As expected, the committee voted to leave the federal funds rate — its lever on market interest rates and the basis of most credit card rates — near zero for the time being.

Stronger job market seen
Projections released with the statement show that the FOMC’s outlook for the job market improved since September, when the last forecast was released. Most committee members predict unemployment of 5.2 to 5.3 percent in 2015,  down from a range of 5.4 to 5.6 percent previously. The committee sees inflation falling to a rate of  1 percent to 1.6 percent in 2015, sharply lower than the previous projection of 1.6 to 1.9 percent.

A majority of the  committee expects the federal funds rate will be between 1 percent and 2 percent by the end of 2015.

Most economists expect the Federal Reserve to begin tightening the U.S. money supply about the middle of 2015, barring sharp changes in the course of economic recovery. At its last meeting in October, the FOMC announced the conclusion of its “quantitative easing” bond buying program, designed to support the housing market by keeping long-term rates low.

“Liftoff” is the term being used to describe the coming rise in short term interest rates, which the Fed essentially controls. As in, will liftoff be in the spring? Midyear? Or not until the second half of 2015?

The answer to that question is an important pocketbook issue for anyone who carries a balance on credit cards. Since 2009 almost the entire card market has adopted variable interest rates, which are pegged to the market. Variable rates can hike your APR on existing balances as frequently as once a month. But no one has noticed, because market rates haven’t gone up since 2006. The prime rate, the near-universal benchmark for credit card rates, is tied to the fed funds rate, and since it hasn’t moved, neither have consumer rates. That lengthy period of interest rate stability — a record since at least the 1960s — will come to an end when the Fed decides it’s time for liftoff.

“We’re approaching the time when the rate may be rising,” said David Ely, an economist at San Diego State University.

Rate hike unlikely before April
Fed Chair Janet Yellen  hinted at the timing in a press conference after the announcement. The Fed is “unlikely to begin the normalization process for at least the next couple of meetings,” she said, putting liftoff no sooner than April.

The FOMC’s statement Wednesday reiterates that rate-setters will watch the economy closely, and push the launch button based on economic progress. The first interest rate hike in over eight years will come when the economy’s vital signs, chiefly employment and inflation, are solidly in the “healthy” range.

On the eve of the announcement, however, reading those signs suddenly got more complicated. Plunging oil prices are making commuters happy, but they’re hurting oil-producing regions from Russia to Alaska. Those regional economic woes might spread in a contagion through interconnected financial markets and trade-dependent businesses.

The FOMC discounted the falling energy prices as temporary, without addressing the jitters in financial markets. The policy announcement predicted that inflation will rise gradually to its goal of 2 percent, “as the labor market improves and the transitory effects of lower energy prices and other factors dissipate.”

Russia’s currency seemed to stabilize Wednesday after a frightening 22 percent plunge earlier in the week, a sign that the government is holding off financial stress. The ruble’s value is a barometer of expectations that the nation will be unable to pay its bills.

“One thing the Fed is looking at is falling oil prices and unsettled global financial markets, but a strong U.S. economy,” said Richard Dye, chief economist at Comerica Bank. “If there is a Russia default or [credit] event, it’s certainly going to catch the attention of financial markets and elevate volatility,” he added. “There could be a chain reaction coming from that.”

U.S. economy looks strong
On the homefront, U.S. consumers are enjoying some of the best times they’ve seen since the recovery from the Great Recession of 2007-2009 began. Prices at the pump are an average $2.55 a gallon, down $1.14 from their 2014 peak, according to the U.S. Energy Information Administration. Lower gas costs should save the typical household about $550 next year, the agency predicts — money that could wind up in retailers’ cash registers, spurring the economy further.

On balance, the falling energy prices are positive for U.S. consumers, Yellen said, as the economy’s exposure to Russia’s woes is relatively slight.

The job market is also looking rosier. A burst of hiring in November added more than 300,000 jobs, the Labor Department’s latest report said, holding the unemployment rate at 5.8 percent. Perhaps more important, average weekly wages rose $5.57 during the month, an indication that pay may be breaking out of its low pace of improvement, which has barely kept up with inflation in recent years.

The Fed is also watching the inflation rate for signs the economy is stronger, but that barometer is changing in ways that are difficult to interpret. The Consumer Price Index plunged 0.3 percent in November, triple what economists expected, as energy prices fell, the Labor Department announced Wednesday. The annual rate of inflation, at 1.3 percent, is well short of the 2 percent mark that the Fed sees as the right temperature for an active, healthy economy.

Forecasters at TD Economics said in a research note that the low inflation reading reinforces their view that the Fed will hold off on a rate increase until late in 2015. “Inflation has fallen off a cliff in recent months following plummeting energy prices,” senior economist James Marple wrote. For consumers, the trade-off will be that higher credit card costs will arrive when the job market is strong and wages are rising, taking the sting out of the rate increase.

See related: What an interest rate increase will cost cardholders

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Credit Card Rate Report Updated: November 25th, 2020
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