Borrowers on credit cards and other consumer loans will probably see their interest rates continue to rise gradually under incoming Federal Reserve Chair Jerome Powell, who was confirmed by the Senate today.
“We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink,” Powell told the Senate Banking Committee during a hearing on his appointment in November. The shrinking balance sheet – meaning Treasury bonds and other securities held by the Fed – is one way the U.S. central bank puts upward pressure on rates.
While other Trump administration nominees have set their agencies on sharply different courses than their predecessors, Powell is seen as a monetary moderate who will continue on the path established under departing Fed Chair Janet Yellen.
Powell, who was confirmed Jan. 23 by the Senate 85 to 12, already has five years’ experience on the Fed’s governing body. He was named to Fed Board of Governors in 2012 by then-President Barack Obama, after serving in the Treasury Department under George H.W. Bush. He will begin his four-year term as chair when Yellen’s term expires Feb. 3, if not sooner.
No major changes in monetary policies expected
“The outlook for interest rates is not too different than if Dr. Yellen had been reappointed,” said Richard Moody, chief economist at Regions Bank.
The Fed’s main lever on rates is its federal funds rate, which sets the price for bank-to-bank overnight loans that are used to meet reserve requirements. In five years of meetings at the rate-setting Federal Open Market Committee, Powell has voted along with the chair and the majority.
The FOMC started pushing up rates in December 2015 as the economic recovery gained strength. Since then, the federal funds rate has gone up four more times for a total of 1.25 percentage points – causing an equal rise for credit card balances. Most consumer cards have variable rates pegged to the banking industry’s prime rate – and the prime rate moves in step with the federal funds rate.
How much more will rates rise? Projections from the FOMC show that the majority of members expect three more quarter-point increases in the federal funds rate in 2018 and three in 2019.
For credit card borrowers, that’s not good news. A 1 percentage point rise in APRs means about $1 a month in higher payments for someone with the average $5,200 balance on cards.
If rates go up by about 3 percentage points as projected, the annual cost will be $156 for the cardholder with average balances – not counting late fees incurred while they try to scrape the extra money together.
That may be better than the alternative, economists say. The Fed rate hikes are based on a rising economic tide that is reducing the jobless rate and increasing paychecks. Yellen has repeatedly said that the data-driven policy is ready to put rate hikes on hold, or roll them back, if the economy starts showing signs of shrinking.
Powell expected to deal with ‘slower-growth economy’
Now that national unemployment is below 5 percent, it will be harder to continue pushing rates up toward their long-run normal levels without seeing a slowing effect, economists say.
For Powell, this means “tightening policy enough to settle the economy into full employment, but not so much that it trips into recession,” economics professor Tim Duy wrote in his influential Fed Watch blog. “The next Fed chair will need to deftly handle the transition to a slower-growth economy,” he wrote.
As the chair, Powell’s role will be to find consensus among the rate-setting committee’s 12 members. That could become more difficult as tradeoffs between normal rates and economic growth become sharper. “It is after all a committee, not a rubber stamp,” Moody of Regions Bank said.
Powell: Current bank regulations are ‘tough enough’
Where Powell contrasts with Yellen is in bank regulation, another role of the Federal Reserve that is separate from its control of interest rates.
During his hearing before the Senate Banking Committee, Powell said he thinks regulations now are “tough enough.” He indicated his focus is on easing rules put in place since the 2008 financial crisis.
That earned him a thumbs-down vote from Sen. Elizabeth Warren, D-Mass., but could mean more capital available for lending.
“He would have a lighter regulatory touch than Dr. Yellen or [former Fed Chair Benjamin] Bernanke had,” Moody said.