Federal Reserve again leaves interest rates unchanged

The Federal Reserve left its lending rates unchanged again on Wednesday, and experts say it's likely to continue that plan until sizable numbers of unemployed Americans begin finding work.  

That central bank decision came at the conclusion of a two-day meeting, with Fed officials voting unanimously to leave its federal funds rate at a range of 0 percent to 0.25 percent, keeping the prime rate at 3.25. Variable rate credit cards -- which account for the majority of plastic -- have annual percentage rates that are set using the prime rate. That means when the central bank eventually raises the fed funds rate, which it last did in December 2008, most cardholders in the United States can expect to pay higher rates on their credit cards. 

However, that decision may be months away. With unemployment currently at 10 percent, economists weren't surprised by the Fed's latest decision to hold off on hiking interest rates. "They're not going to do it before they have positive employment numbers," likely around the second quarter of 2010, says John Silvia, chief economist with Wells Fargo

Fed points to job lossesThe Fed highlighted the unemployment problem in the first sentence of the statement accompanying its decision. "Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating," the Fed said.

Still, despite that note of optimism, the Fed says that joblessness remains a challenge. "Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit," the statement said.

Amid other key portions of the Fed's statement, its language didn't change at all from earlier statements -- for example, when saying that the strength of the economic growth isn't enough to warrant interest rate hikes. The Fed said it continues to expect the health of the economy to require "exceptionally low levels of the federal funds rate for an extended period."

Unemployment continues to influence lending ratesAnalysts agree the Fed is waiting on the labor market's recovery. Although the U.S. economy has shown signs of life, the unemployment rate remains in the double digits. In October, unemployment reached 10.2 percent, before dipping slightly to 10 percent in November. 

"The Fed typically waits for the unemployment rate to fall notably for a number of months before it is willing to raise rates, and we believe this should prove especially true with the unemployment rate at a 10.0 percent level," Barclays Capital's economics team said in its weekly report on Dec. 11.

That means, for the time being, any changes to annual percentage rates will come from the card issuers themselves rather than the Fed.

Banks making movesBanks continue to suffer losses as unemployed workers struggle to repay their loans. On Tuesday, Capital One said its U.S. credit card charge-offs  -- or the amount of loans the bank has given up on collecting -- rose to 9.6 percent in November, Discover reported that its credit card charge-offs increased to 8.98 percent and Chase said its write-offs advanced to 8.81. Bank of America, meanwhile, posted a 13 percent write-off rate in November, down from the previous months' rates, but still the highest rate among those banks that have so far reported their results. 

To offset these losses, banks have made borrowing more costly and difficult for cardholders. For card issuers, "you tighten the standards in a recession and loosen the standards as the recovery proceeds," Silvia says. Banks have also blamed their tighter lending standards on increasing regulation, which lenders say makes doing business more expensive. 

For now, banks are more focused on the current recession than a pending recovery. As of last week, interest rates on new credit card offers reached 12.75 percent, according to the CreditCards.com Weekly Credit Card Rate Report. That's the eighth increase in the past 12 weeks, and it represents an increase of more than three-quarters of a point from June and a point and a half since summer of 2008. Cardholders may also find themselves paying higher fees for late payments, balance transfers and cash advances, as well as inactivity fees.

However, Silvia says that card issuers have likely already implemented the bulk of their interest rate increases. "I have to believe most of the change occurs in availability rather than the rate itself," he says, with consumers still finding it difficult to get their existing credit lines extended or get approved for new credit cards.

As for interest rates, Silvia says credit card APRs could start to come down after the Fed begins to adjust its monetary policy next summer. (The prime rate is just one of the factors that influences credit card APRs, so banks still have significant control over many of the others.) "I think the banks are going to lag whatever the Fed does, so it won't be until the end of next year before anything gets done" by card issuers, he says.

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