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Andrew Harrer/Bloomberg/Getty Images November 02, 2022 Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues. Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer. Bankrate logo

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Pandemic-related effects led to inflation

The Fed’s actions are aimed at combating the inflation that surfaced post-pandemic. With supply chain disruptions and provided during the pandemic, along with the impact of the war in Ukraine (which has impacted the price of oil and other commodities), stoking inflation, the Fed is now focused on raising its targeted interest rate to combat any fallout from inflation that has proved to be stickier than the Fed expected. After the coronavirus pandemic began in 2020, the Fed initiated rate cuts that brought down its target interest rate to practically 0 percent. This low rate was aimed at spurring consumption and business investment in order to keep the economy’s wheels greased as it recovered from the crisis. The Fed also stepped in to purchase mortgage-backed securities and Treasury securities, which also had the effect of pumping money into the economy and lowering interest rates. It took additional measures as well to prevent financial markets from freezing up. Now, in what is known as , the Fed has also started gradually shedding its balance sheet of the securities it acquired. This action will suck up money from the economy and further aid the Fed’s agenda by pushing up interest rates due to the reduced money supply.

Employment and inflation goals

The Fed’s actions are guided by its dual mandate of managing both employment and inflation to optimize economic performance. Its aim is to shoot for maximum employment while letting inflation run at 2 percent in the long run, making for price stability. Back in 2020, the Fed decided it would keep rates low — even as employment rose — to make the labor market more inclusive and allow even disadvantaged groups to get jobs, keeping in mind the lessons learned after the 2008 recession (when inflation did not rise even though employment continued to grow). It seemed the Fed would not start raising rates until 2023. However, considering that the pandemic-influenced inflation continues to linger and has been further fueled by the war in Ukraine, the Fed is now focused on bringing it down so that expectations for higher inflation don’t get entrenched in the minds of consumers and businesses. The good news is that the labor market remains strong even as the Fed has raised its target rate multiple times in 2022. In September, the U.S. economy , and unemployment was at 3.5 percent. In 1980, inflation under Fed Chair Paul Volcker reached 11 percent. With that lesson in mind, the Fed is now focused on acting before the inflation situation gets out of hand, with consumers and businesses anticipating higher inflation down the road.

Medium-term inflation expectations have declined

In a positive for the Fed, it seems consumers are not wedded to the idea that current high inflation levels will continue to stick. A consumer survey by the Federal Reserve Bank of New York finds that respondents’ median for the year ahead are at 5.4 percent in September. And for the three-year ahead period, inflation expectations had dropped to 2.9 percent. In an early , Fed Vice Chair Lael Brainard noted that monetary policy will be restrictive for some time to make sure that inflation gets to the Fed’s target rate over time. “It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down,” said Brainard. “In light of elevated global economic and financial uncertainty, moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting to cumulative tightening in order to inform our assessments of the path of the policy rate.” She observed that labor market conditions still remain tight causing strong wage growth. This, coupled with high housing costs, means inflation in the core services sector will only ease slowly. On the other hand, there is more promise for easing of inflation in the goods sector. For one, consumer demand post-pandemic has been gradually moving away from goods and towards services. And supply chains have been healing while import prices have declined. Another positive is that the profit markups in the retail sector (particularly automobiles), which had been very high during the pandemic, are now returning to more normal levels. And Fed Governor Christopher J. Waller said in a that it will be a while before inflation gets to the Fed’s 2 percent goal, which means it will be in tightening mode into 2023.

Impact on credit card interest rates

What all this means for cardholders is that you are likely to see your variable card rates increase. These rates are tied to the , to which issuers add a markup to arrive at your card’s interest rate. The prime rate, in turn, is based on the Fed’s target interest rate. This means that when the Fed starts hiking its target rate, the prime rate will also go up. And when the prime rate goes up, variable interest rates soon follow. In fact, continue moving up, with the national average APR at 18.73 percent at the end of October, from 16.34 percent in March. That means you should start managing your more strategically. If you carry a balance, make plans to pay it off. If you will be carrying a balance for a while, you could transfer it to lower-interest options, such as a 0 percent interest offer. You might also consider taking out a personal loan to pay off your credit card if that offers a better deal for you. Home prices have been on a tear in recent years, and homeowners could even weigh getting a to pay off credit card debt.

The bottom line

The Fed is continuing the process of fighting inflation, hiking up its target rate by another 75 basis points in November. Market experts in December. Since variable credit card interest rates are tied to the prime rate, which is based on the fed funds rate, consumers should be prepared for their variable interest rates to go up, too. SHARE: Poonkulali Thangavelu is a senior writer and columnist at CreditCards.com and Bankrate, addressing debt and credit card-related legal and regulatory issues. Cathleen's stories on design, travel and business have appeared in dozens of publications including the Washington Post, Town & Country, Wall Street Journal, Marie Claire, Fodor’s Travel, Departures and The Writer.

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