The Federal Reserve has made significant inroads in its fight against inflation, bringing it down to 3.7 percent in August. However, although the central bank is not quite declaring victory yet, it maintained its target interest rate in the 5.25 percent to 5.50 percent range at its September 2023 meeting.

In a press release indicating its interest rate decision, the Federal Open Market Committee, the Fed’s rate-setting body, noted, “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Federal Reserve members also anticipate, in their economic projections release, that their target rate could go to 5.6 percent this year, which implies the possibility of at least one more rate increase by year-end.

Fed remains vigilant about inflation

The Fed began a series of rate increases in March 2022 (when inflation was at 8.5 percent), and has lifted up its target rate from 0 percent with a total of 11 rate hikes through July 2023.

While the failures of Silicon Valley Bank and Signature Bank in March have aided the Fed’s job of slowing down the economy by making credit less available to businesses and consumers, the Fed remains vigilant in its fight against inflation. Last year, inflation was running at its highest level in more than 40 years, and the Fed will not be complacent until it is convinced it has slayed the beast.

In 1980, inflation under Fed Chair Paul A. Volcker reached 11 percent. With that lesson in mind, the Fed is now focused on acting to quell inflation so that consumers and businesses don’t anticipate higher inflation down the road.

Pandemic-related effects led to inflation

The Fed’s actions are aimed at combating inflation that surfaced post-pandemic. With supply chain disruptions and stimulus efforts provided during the pandemic, along with the impact of the war in Ukraine (which affected the price of oil and other commodities), stoking inflation, the Fed has been focused on raising its targeted interest rate to combat the fallout from inflation that proved to be stickier than the central bank expected.

After the coronavirus pandemic began in 2020, the Fed initiated rate cuts that brought down its target interest rate to practically 0 percent. This low rate was aimed at spurring consumption and business investment in order to keep the economy’s wheels greased as it recovered from the crisis.

The Fed also stepped in to purchase mortgage-backed securities and Treasury securities, which, too, had the effect of pumping money into the economy and lowering interest rates. It took additional measures as well to prevent financial markets from freezing up.

Now, in what is known as quantitative tightening, the Fed is also gradually shedding its balance sheet of the securities it acquired. This action will suck up money from the economy and further aid the Fed’s agenda by pushing up interest rates due to the reduced money supply.

Employment and inflation goals

The Fed’s actions are guided by its dual mandate of managing both employment and inflation to optimize economic performance. Its aim is to shoot for maximum employment while letting inflation run at 2 percent in the long run, making for price stability.

Back in 2020, the Fed decided it would keep rates low — even as employment rose — to make the labor market more inclusive and allow even disadvantaged groups to get jobs, keeping in mind the lessons learned after the 2008 recession (when inflation did not rise even though employment continued to grow). It seemed the Fed would not start raising rates until 2023, but as inflation concerns surfaced, the central bank started its tightening cycle earlier in March 2022.

Considering that the pandemic-influenced inflation continues to linger and has been further fueled by the war in Ukraine, the Fed is now focused on bringing inflation down so that expectations for higher inflation don’t get entrenched in the minds of consumers and businesses.

Further, even though rising interest rates have brought down inflation, the labor market remains surprisingly strong. Employers added 187,000 jobs in August, while the unemployment rate rose to 3.8 percent as more people participated in the labor market, either working or actively looking for work. Average hourly earnings were up 4.3 percent over the year; however, the government revised down jobs numbers for June and July, which means 110,000 fewer jobs were added in those two months together than previously reported.

Consumers anticipate reduced inflation

On the inflation front, it seems consumers are not wedded to the idea that current high inflation levels will continue to stick. A consumer survey by the Federal Reserve Bank of New York finds that respondents’ median inflation expectations for the year ahead were at 3.6 percent in August. For the three-years ahead period, inflation expectations were at 2.8 percent.

Speaking in August at the Fed’s economic policy symposium in Jackson Hole, Wyoming, Fed Chair Jerome Powell noted, “Although inflation has moved down from its peak — a welcome development — it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

He noted that U.S. economic output has continued to grow while consumer spending has been “especially robust.” Moreover, the housing sector is picking up. He said, “Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

According to a forecast by the American Bankers Association’s Economic Advisory Committee, made up of economists with large North American banks, the U.S. economy’s prospects for achieving a soft landing scenario have improved. And given the progress on inflation, the ABA committee also believes the Fed’s tightening cycle has “run its course.”

Even then, “the battle against inflation is not yet won, so the Fed must remain vigilant,” the ABA committee said.

Impact on credit card interest rates

What all of this means for cardholders is that you are likely to see your variable card interest rates remain at current high levels for a while. These rates are tied to the prime rate, to which issuers add a markup to arrive at your card’s interest rate. The prime rate, in turn, is based on the Fed’s target interest rate. This means that when the Fed starts hiking its target rate, the prime rate will also go up.

And when the prime rate goes up, variable interest rates soon follow. In fact, interest rates on credit cards have been moving up, with the national average APR higher than 20 percent as of mid-September 2023, up from 16.34 percent in March 2022.

That means you should start managing your credit card balances more strategically. If you carry a balance, make plans to pay it off. If you will be carrying a balance for a while, you could transfer it to lower-interest options, such as a balance transfer credit card with a 0 percent intro APR.

You might also consider taking out a personal loan to pay off your credit card if that offers a better deal for you. Home prices have been on a tear in recent years, and homeowners could even weigh getting a home-equity loan to pay off credit card debt.

The bottom line

While the Fed maintained its target rate in the 5.25 percent to 5.50 percent range at its September meeting, the central bank hasn’t yet declared victory in its fight against inflation. This means the Fed could take rates higher at upcoming meetings this year. Since variable credit card interest rates are tied to the prime rate, which is based on the federal funds rate, consumers should be prepared for their variable interest rates to continue to remain at current high levels. That means you should take strategic action if you carry credit card balances so that you pay the lowest interest rate you can get.