Feds Announce Plans To Keep Rock Bottom Interest Rates For The Third Year Running

Thursday, January 26th, 2012

Members of the Federal Open Market Committee voted recently to keep the federal funds interest rate between 0 and 0.24% well into 2014.

According to an announcement recently made by the Federal Reserve, interest rates will be left at their current ultra low levels for another three years or longer.

Credit card holders can breathe a sigh of relief knowing that the federal funds rate will be left alone until at least the latter part of 2014, because they have nothing to fear as far as a sudden a sudden rate hike is concerned. The majority of credit cards are variable rate cards, which means that they are directly tied to the prime rate. The prime rate generally sits about three percentage points higher than the federal funds rate. Therefore, whenever the federal funds rate is increased, the APR’s on all variable rate credit cards show an immediate increase as well.

As Robert Mellman, a senior economist at J.P. Morgan Chase says, “The lower the federal funds rate, the lower the credit card rate.”

The group of individuals in charge of setting the country’s monetary policy is known as the Federal Open Market Committee. The FOMC is what voted to hold the federal funds rate at the current low of 0% to .25%, which is the same decision they reached for the past three years. The rate was first dropped to that historically low level in December 20008 in response to the nation-wide economic crisis. As of yet the FOMC is still not opting to call for an increase of the federal funds rate until there are substantial signs that the economy is showing significant improvements.

Economists explain that members of the Federal Reserve believe that keeping interest rates low will incite businesses into inventing in growth now as opposed to waiting until more favorable economic conditions. This, in turn, will encourage consumers to spend money, especially on things like new homes and cars.

“When they keep their rates low, other interest rates tend to be low. Mortgage rates have come down below 4 percent. Auto finance rates are lower than they used to be. And for companies, if they’re big enough to have access to financial markets or they have long-term access to rates, they can also borrow at relatively low rates,” says Mellman.

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