The Federal Reserve has made notable progress in its efforts to combat inflation, with the rate declining slightly to 3.3 percent in May, down 0.1 percent from April. As a result, the Fed opted to keep its target interest rate steady in the range of 5.25 percent to 5.50 percent during its June 2024 meeting.

In a statement regarding this decision, the Federal Open Market Committee, which sets rates for the Fed, indicated that “the risks to achieving its employment and inflation goals have improved over the past year.” However, they also emphasized that “the economic outlook remains uncertain, and the Committee is closely monitoring inflation risks.”

The statement added that the Committee does not foresee reducing the target range until there is greater confidence that inflation is trending sustainably toward the 2 percent goal.

Fed remains vigilant about inflation, but likely done with rate raises

The Fed initiated a series of rate hikes in March 2022, when inflation stood at 8.5 percent, raising its target rate from 0 percent through a total of 11 increases by July 2023. Since then, the Fed has kept rates steady.

While these rate hikes have successfully contributed to lowering prices, the Fed remains watchful in its ongoing battle against inflation. In 2022, inflation surged to its highest level in over 40 years, and the Fed is committed to ensuring it doesn’t return.

Historically, under Fed Chair Paul A. Volcker, inflation hit 11 percent in 1980, prompting aggressive rate hikes that led to a recession—a scenario the Fed is keen to avoid this time. With this in mind, the Fed is determined to ensure inflation is under control before considering any reductions to the target rate, aiming to prevent consumers and businesses from anticipating future inflation increases.

Pandemic-related effects led to inflation

The Fed’s series of rate hikes since March 2022 has been a response to rising post-pandemic inflation. Factors such as supply chain disruptions, pandemic-era stimulus measures, and the effects of the Ukraine war—particularly on oil and commodity prices—have all contributed to inflation that turned out to be more persistent than anticipated.

In response to the onset of the coronavirus pandemic in 2020, the Federal Reserve slashed its target interest rate to nearly 0 percent to stimulate consumption and business investment, helping the economy recover from the crisis. Additionally, the Fed purchased mortgage-backed and Treasury securities, injecting liquidity into the economy and further lowering interest rates while implementing measures to prevent disruptions in financial markets.

Now, through a process known as quantitative tightening, the Fed is gradually reducing its balance sheet by selling off the securities it acquired. This will withdraw money from the economy, supporting the Fed’s efforts to raise interest rates by decreasing the money supply.

Employment and inflation goals

The Fed’s actions are guided by its dual mandate to manage both employment and inflation for optimal economic performance. Its goal is to achieve maximum employment while maintaining long-term inflation at around 2 percent, ensuring price stability.

In 2020, the Fed opted to keep interest rates low, even as employment increased, to promote a more inclusive labor market that benefits disadvantaged groups. This approach was influenced by lessons from the 2008 recession, where inflation remained low despite rising employment. Initially, it seemed the Fed wouldn’t raise rates until 2023, but rising inflation concerns prompted the central bank to begin tightening in March 2022.

With pandemic-related inflation persisting and exacerbated by the war in Ukraine, the Fed is now focused on reducing inflation to prevent entrenched expectations of higher prices among consumers and businesses. Additionally, geopolitical tensions have been heightened by events such as the Hamas attack on Israel in October 2023.

Despite rising interest rates leading to a reduction in inflation, the labor market remains robust. In May, employers added 272,000 jobs, keeping the unemployment rate low at 4.0 percent. Average hourly earnings increased by 4.1 percent over the previous year, although the government revised job figures for March and April, indicating that 15,000 fewer jobs were added during those months than initially reported.

Consumers anticipate reduced inflation

Regarding inflation, consumers appear less convinced that current high levels will persist. A University of Michigan survey from May indicates that consumers expect inflation to rise to 3.3 percent over the next year, up from a March expectation of 2.9 percent. The earlier figure of 2.9 percent was the lowest consumers had anticipated for the upcoming year in three years.

Impact on credit card interest rates

For cardholders, this means that variable credit card interest rates are likely to remain high for the foreseeable future. Your credit card rates are linked to the prime rate, which is determined by adding a markup to the Fed’s target interest rate. As the Fed raises its target rate, the prime rate increases as well.

Consequently, when the prime rate rises, variable interest rates on credit cards follow suit. Over the past two years, credit card interest rates have been on the rise, although there was a slight drop recently. In early June, the national average APR was 20.68 percent, up from 20.66 percent in May.

This situation calls for more strategic management of your credit card balances. If you’re carrying a balance, prioritize paying it off. If you anticipate carrying it for some time, consider transferring the balance to a lower-interest option, like a balance transfer credit card with a 0 percent introductory APR.

You might also explore the option of a personal loan to pay off your credit card debt if it offers better terms. With rising home prices, homeowners could think about taking out a home equity loan to consolidate credit card debt. Additionally, consider picking up a side gig to generate extra income for debt repayment.

In Conclusion

At its June 2024 meeting, the Fed decided to keep its target rate in the 5.25 percent to 5.50 percent range, indicating that while progress has been made, it hasn’t yet declared victory over inflation. The central bank appears to have halted rate hikes for now, with a forecast for one rate reduction later in 2024.

Because variable credit card interest rates are linked to the prime rate, which is influenced by the federal funds rate, consumers can expect these rates to remain elevated for the foreseeable future. If you carry credit card balances, it’s important to take strategic measures to secure the lowest interest rates available to you.