The Fed is struggling to control inflation, with markets expecting a 50 basis point rate hike at its June meeting for the third time since March this year. That would put the target rate in the range of 1.25% to 1.5%.
And it doesn’t look like the Fed will stop there. In a statement released alongside the May meeting, the Fed’s rate-setting committee noted that it expects “continued increases in the target rate to be justified.” Banking economists surveyed by the American Bankers Association expect the Fed to raise rates by a further 100 basis points at its meeting after June. That would keep the policy rate in the 2.25% to 2.5% range by the end of the year.
The effects of the Fed’s actions could trickle down to credit card holders. You should be prepared for your variable deck to grow.
The Fed’s actions are aimed at tackling inflation that has emerged in the wake of the pandemic. With supply chain disruptions and rescue efforts during the pandemic, as well as the fallout from the war in Ukraine (which has affected oil prices and other commodities) and fueling inflation, the Fed is now focused on raising its target rate to combat the effects of all of this persistent inflation.
Consequences of pandemic support?
When the 2020 coronavirus pandemic emerged, the Fed began to monitor the situation closely. It made two rate cuts outside its scheduled meeting in March, slashing the target rate by 1.5 percentage points to effectively 0%.
As the crisis recovers, such low rates should boost consumption and business investment to keep the economy afloat.
The Fed also stepped in to buy mortgage-backed securities and government bonds, which also led to money being pumped into the economy and lowered interest rates. It also took additional steps to prevent financial market freezes.
Now, as part of so-called quantitative tightening, the Fed has also begun to gradually shrink its balance sheet of securities purchased. This action would suck money out of the economy and further support the Fed’s agenda by raising interest rates as the money supply dwindles.
JPMorgan Chase CEO Jamie Dimon appears to be concerned about the fallout from the Fed’s balance sheet sell-off.
Because these companies have been the biggest buyers of government bonds during this crisis, Dimon is bracing for some volatility this time around when the Fed sells those securities. Another issue for Dimon is the impact of the Ukraine war on oil and commodity prices.
Employment and Inflation Targeting
The Fed’s actions are guided by the dual mandate of managing employment and inflation in the economy (to achieve price stability). Their goal is to maximize employment and keep inflation at 2% over the long term.
The U.S. economy added 390,000 jobs through May, with an unemployment rate of 3.6%. On the positive side, wage growth has slowed from April levels, much to the Fed’s relief.
Back in 2020, as part of its asymmetric inflation targeting, the Fed decided that it would not raise the target rate even if inflation was above the 2% target for a period of time, given that inflation was below this 2% target. level for several years.
Take into account the lessons learned from the last recession (when inflation didn’t rise even though employment continued to grow). The Fed doesn’t appear to start raising rates until 2023.
Fed officials had previously viewed inflation as “transitory” and not sustainable. However, with inflation above 7% for a few months, reaching 8.6% in May, the Fed will continue to raise interest rates. She believes the job market can withstand her rate hike.
In 1980, under Federal Reserve Chairman Paul Volcker, inflation hit 11%. With that in mind, the Fed’s focus now is on pre-empting inflation before it gets out of hand.
Inflation expectations rise
In recent comments, Fed Governor Christopher J. Waller said he saw long-term inflation expectations rise from below 2% to just above 2%. (Inflation expectations for the next three years were at 3.9% in April, compared with 3.7% in March, according to a consumer survey by the Federal Reserve Bank of New York.) Waller wants the Fed to cut rates by 50% for some time. Until he sees inflation approaching the Fed’s 2% target.
In terms of the impact on employment, Waller said the vacancy rate is so high that, even with a 2.5 percentage point drop in vacancy due to Fed tightening, it would remain at a healthy level at the end of the previous quarter. saw expansion. Early 2020.
Impact on credit card interest rates
For cardholders, all of this means you may see an increase in variable card rates. These prices are tied to the best available price. The benchmark rate, in turn, is based on the Fed’s target rate. This means that when the Fed starts raising interest rates, interest rates will also rise.
If key rates rise, floating rates will soon follow. In fact, credit card rates have risen, with the national average APR at 16.68% in early June compared to 16.34% in March.
This means you should start managing your credit card balances more strategically. If you have a balance, plan to cash it out. If you have a balance over a period of time, you can roll it over to a lower interest rate option, such as paying off your credit card with a personal loan if that’s a better deal for you.
Keputusan akhir
The Federal Reserve is continuing to end the loose monetary policy it has undertaken to prop up the economy during the pandemic. Markets expect a 50 basis point increase in the target rate in June and a continuation of a series of hikes this year. Because floating rates on credit cards are tied to the prime rate based on the federal funds rate, consumers should be prepared for a rise in variable rates.
