A do-nothing Fed helps some credit card holders

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Someday the Federal Reserve will raise short-term interest rates. Just not now.

The Fed’s open market committee, which sets short-term rates, meets Tuesday.

No one expects the committee to raise or cut rates. The benchmark federal funds rate, also known as the overnight rate, will remain at 1.25 percent. The prime rate, which rises and falls with the overnight rate, will remain at 4.25 percent.

This is good, albeit expected, news for holders of some variable-rate credit cards. About 55 percent of credit cards have variable rates, and most of them are linked to the prime rate. Many variable-rate cards are repriced each quarter. That means there can be a lag of up to three months between a Fed rate change and a corresponding change in variable credit card rates. In November, the Fed cut short-term rates by a half-point, so lots of issuers won’t cut rates on variable-rate cards until this month or next.

If the Fed holds rates steady this month, more cardholders can look forward to lower rates when their cards are repriced in the coming weeks. The process has already begun, according to Bankrate.com’s weekly national survey of credit card rates. The national average on standard variable cards was 13.96 percent on Nov. 6, the day the Fed cut rates a half-percent. Today, the national average stands at 13.60 percent.

Other cardholders are out of luck: They reached the floor, or minimum rate, on their card long ago — perhaps back in 2001, when the Fed cut rates 11 times.

Other types of debt often are linked to the prime rate: auto loans, home equity loans and home equity lines of credit. They will follow the same path as variable-rate cards: either rates will stay flat or they will drop in delayed reaction to last month’s Fed rate cut.

Mortgage rates don’t respond directly to changes in short-term rates. Fixed rates for 15- and 30-year mortgages have risen in the last three weeks.

Members of the Fed have been saying for months that short-term rates are “accommodative,” meaning that they are designed to stimulate the economy. Rates have been accommodative for so long that it makes you wonder when they’ll become unaccommodative, like a host whose guest has worn out his welcome.

Well, the folks at the Fed are pretty darn patient. They won’t toss out the welcome mat for low rates until low rates threaten to bring inflation into the house. And it doesn’t look like that will happen soon.

“There’s little reason for the Fed to do anything at this point,” says Gary Schlossberg, economist with Wells Capital Management. Inflation isn’t an issue right now, and the Fed “would prefer to see the economy on firmer footing before they move.”

Schlossberg points to the early 1990s, when the Fed ended a rate-cutting cycle on Sept. 4, 1992, and left the overnight rate at 3 percent for 17 months before finally raising it again on Feb. 4, 1994. That proves that the Fed is willing to exercise patience.

“The long-term prospects are bright,” Michael Moskow, a member of the Fed’s rate-setting committee and president of the Federal Reserve Bank of Chicago, told an audience of bankers late last month. He added that, “we see the economic expansion regaining momentum next year with growth reaching its potential during 2003.”

If and when growth reaches its potential next year, the debate will start over when to start raising rates again.

— Posted: Dec. 6, 2002