Skip to Main Content

Fed’s upcoming interest rate hikes will take credit card rates higher

Federal Reserve building
Andrew Harrer/Bloomberg/Getty Images
Federal Reserve building
Andrew Harrer/Bloomberg/Getty Images
Bankrate Logo

Why you can trust Bankrate

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for . The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Terms apply to the offers listed on this page. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

ON THIS PAGE Jump to Open page navigation

The Federal Reserve is earnestly engaged in efforts to tackle inflation, with the market anticipating a 50 basis point hike at its June meeting, its third for the year since March. That would take its target rate to the 1.25 percent to 1.5 percent range.

And it doesn’t look as though the Fed will stop there. In the statement released in concert with its May meeting, the Fed’s rate-setting committee noted it expected “ongoing increases in the target rate will be appropriate.” Bank economists surveyed by the American Bankers Association expect the central bank to further hike its target rate by a total of 100 basis points at meetings coming up after June. That would take the fed funds rate to the 2.25 percent to 2.5 percent range by year end.

The impact of the Fed’s actions is likely to filter down to credit cardholders. You should be prepared to see your variable card rates go up.

The Fed’s actions are aimed at combating the inflation that has surfaced post-pandemic. With supply chain disruptions and relief efforts provided during the pandemic, along with the impact of the war in Ukraine (which has impacted the price of oil and other commodities), stoking inflation, the Fed is now focused on raising its targeted interest rate to combat any fallout from lingering inflation.

Fallout from pandemic support?

When the coronavirus pandemic made an appearance in 2020, the Fed started watching the situation closely. It made two interest rate cuts in March outside of its scheduled meetings, bringing its target rate down 1.5 percentage points 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 also 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 has also started 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.

It seems Jamie Dimon, JPMorgan Chase’s chief executive officer, is concerned about fallout from the Fed’s balance sheet selloff.

In comments made at a financial conference in New York, Dimon noted that JPMorgan is bracing for an economic “hurricane.” He sees a potential impact from the Fed’s efforts at raising interest rates, including quantitative tightening. According to Dimon, there is reduced appetite for Treasury bonds from central and commercial banks as well as foreign exchange trading firms compared to the 2008 financial crisis.

With these entities being the major buyers of Treasuries during that crisis, Dimon is preparing for some volatility this time as the Fed sheds those securities. Another issue weighing on Dimon is the fallout on oil and commodity prices of the Ukraine war.

Employment and inflation goals

The Fed’s actions are guided by its dual mandate of managing both employment and inflation (so as to achieve price stability) in the economy. Its aim is to shoot for maximum employment while letting inflation run at 2 percent in the long run.

As of May, the U.S economy added 390,000 jobs, and unemployment was at 3.6 percent. One positive note is that wage gains had moderated from April levels, providing some relief for the Fed.

Back in 2020, in an asymmetric inflation targeting, the Fed had decided it was comfortable not raising its target rate even if inflation went past its 2 percent target for a while, considering that inflation had run below this 2 percent rate for several years.

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 from the last downturn (when inflation did not rise even though employment continued to grow). It seemed the Fed would not start raising rates until 2023.

Fed officials had previously been of the opinion that inflation was “transitory” and would not linger. However, with inflation crossing the 7 percent threshold for a few months, touching 8.6 percent for May, the Fed will continue to hike up rates. It believes that the labor market can withstand the impact of its rate hikes.

In 1980, inflation under Fed Chair Paul Volcker reached 11 percent. With that lesson in mind, the Fed is now focused on acting preemptively before the inflation situation gets out of hand.

Inflation expectations up

In recent public commentary, Fed Governor Christopher J. Waller said he sees expectations for long-term inflation as having risen from below 2 percent to a little above 2 percent. (And a consumer survey by the Federal Reserve Bank of New York found that inflation expectations for the three-years ahead period were at 3.9 percent in April, from March’s 3.7 percent.) Waller would like the Fed to hike rates by 50 basis points for a while until he sees inflation get closer to the Fed’s targeted 2 percent.

Regarding the fallout on the employment front, Waller says the vacancy rate is so high that even if it declines 2.5 percentage points as a result of the Fed’s tightening, that would still leave it at the healthy level seen at the end of the last expansion, in early 2020.

Impact on credit card interest rates

What all this means for cardholders is that you are likely to see a hike in your variable card rates. These rates are tied to the prime 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 already moved up, with the national average APR at 16.68 percent in early June, from 16.34 percent in March.

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 0 percent interest balance transfer offer. You might also consider taking out a personal loan to pay off your credit card if that offers a better deal for you.

The bottom line

The Fed is continuing the process of ending the easy-money policy it undertook during the pandemic to support the economy. The market expects it to hike up its target rate by 50 basis points in June, and continue with a series of rate hikes this year. Since variable credit card interest rates are tied to the prime rate, which is based on the fed funds rate, consumers should be prepared for their variable interest rates to go up too.

Written by
Poonkulali Thangavelu
Senior Reporter
Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues.
Edited by
Senior Editor