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Fed Leaves Federal Funds Rate Alone


Fed Leaves Federal Funds Rate Alone

Last week The Federal Reserve did not make any adjustment to interest rates, holding the key lending rate at between 0 and 0.25 percent.

The rate has been kept low since December 2008 and the Fed’s announcement simply confirms that this is set to continue as the country rebuilds it’s ailing economy.

Thanks to the news, credit card holders will not be hit with an unexpected increase in APRs, which would have been an inevitable side effect of any increase in the Federal Funds Rate. Senior Economist Greg Daco of IHS Global Insight said, “I don’t expect much impact on consumers.”

However, the unchanging rate is not indication that the Fed has been resting on their laurels. Over the course of the last two meetings of the Federal Reserve some important decisions were made. First of all a commitment was made to leave rates unchanged until at least the middle of 2013.

Asha Bangalore, senior vice president and economist with The Northern Trust Company explained why she thinks this decision was reached, “The reasons are tepid economic growth, an elevated unemployment rate and a distressed housing sector.” In the next meeting, the Fed put ‘Operation Twist’ into action. This is a plan which has the goal of lower long-term interest rates while raising short-term interest rates. This is intended to encourage consumers to take on mortgages rather than short term loans.

While no new moves were announced after the most recent meeting, the Fed did release a statement which suggested they are still working through ongoing economic concerns. The statement said,

Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.

Since the Fed has left rates alone, consumers need not fear any sudden increases in credit card APR. The majority of card issuers in America operate under variable rates linked to the prime rate. Since the prime rate closely follows the direction and level of the Federal Funds Rate, APRs are unlikely to rise substantially until such time as the Fed raises their rate. However, credit card holders are not guaranteed safety from high interest rates, but they can expect them to rise more gradually rather than a large unexpected jump.

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