Although the Federal Reserve has made inroads in its fight against inflation, bringing it down to 5 percent in March, the central bank is not quite declaring victory yet and is continuing to take up its target interest rate.

The central bank announced at its May 2023 meeting that it will raise its target interest rate range by a quarter of a percentage point, to the 5.0 percent to 5.25 percent range. This follows a series of rate increases that started in March 2022 (when inflation was at 8.5 percent), lifting up the Fed’s target rate from 0 percent.

The Fed also “remains highly attentive to inflation risks.” 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, it seems the Fed remains vigilant in its fight against inflation.

And Fed officials’ forecast for an appropriate federal funds rate for 2023 (when they last made projections in March) was in a trimmed range of 5.1 percent to 5.6 percent. This means there could be additional rate increases this year.

In other words, if you’re tapping into your credit card and don’t pay off the balance when it’s due, you will likely pay more interest than you bargained for. With higher interest rates, it’s smart to be strategic about your credit card debt.

While inflation has been moderating in recent months, the Fed is still on alert. In the last year, inflation has been 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 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 focused on raising its targeted interest rate to combat 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.

And while the labor market remains strong despite the Fed’s rate hikes, it is starting to show signs of weakening. For one, job creation has been declining. It was down to 236,000 in March, following February’s 326,000 number and January’s robust 472,000 figure. Moreover, the government’s “job openings and labor turnover” report for March shows that job openings declined to 9.6 million, down 1.6 million from December. And the number of layoffs and discharges rose 1.2 percent to 1.8 million.

Consumers anticipate reduced long-term 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 4.7 percent in March. However, for the five-year ahead period, inflation expectations were at 2.5 percent.

In a late-April speech at Georgetown University, Fed Governor Lisa D. Cook noted that while the March dip in inflation (on the Consumer Price Index) to 5 percent is encouraging, “the big question, however, is whether, and how quickly, inflation will continue its downward path toward our target of 2 percent.” Considering that much of the decline is thanks to a dip in energy prices, she expects that the path back to the Fed’s inflation goal is likely to be long and bumpy. Cook also pointed out that there are signs that the labor market is “softening at the margin.”

As for her monetary policy stance, Cook is gauging the impact of some signs of “stronger momentum” in the economy versus “potential headwinds” from the recent bank failures. She noted, “If tighter financing conditions are a significant headwind on the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence. But if data show continued strength in the economy and slower disinflation, we may have more work to do.”

Impact on credit card interest rates

What all this means for cardholders is that you are likely to see your variable card rates continue to increase. 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 continue moving up, with the national average APR higher than 20 percent as of May 3, 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 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. 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

The Fed is continuing the process of fighting inflation, hiking up its target rate by another 25 basis points in May. And it seems the central bank may not be quite done yet. 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 increase, too.