Credit cards and the floating rate channel of monetary policy

ABSTRACT

I quantify the impact of Federal Funds Rate (FFR) movements on consumers’ welfare via the floating, or variable, rate on their credit cards. I first newly document that 96% of card rates adjust to the FFR within 3 months of a change in the latter. Exploiting these rate changes, I construct a model of card use and estimate it using a national database of U.S. card accounts. Model estimates imply that a hypothetical 25 bp rise in the FFR lowers annual consumers’ surplus by 0.23% of personal consumption expenditures ($31.97 billion), and disproportionately more so in lower income areas.

KEYWORDS:

• Consumer finance
• credit cards
• pricing
• monetary policy

JEL CLASSIFICATION:

• E52
• G28
• G51

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ https://www.federalreserve.gov/paymentsystems and https://fred.stlouisfed.org/series/USPCE for purchasing and consumption expenditures, respectively.

² See https://www.newyorkfed.org/microeconomics/hhdc.html.

³ This is not surprising as the practice of re-pricing of card accounts had stopped by 2011 (Nelson 2017)

⁴ Note that ${\bar{K}}_i$ also includes potential late fees and possibly default, all of which are costly.

⁵ I abstract from including a credit limit. Adding this would not alter the basic trade-offs in the model. Empirically, while many users make no purchases and/or carry no balances, few ever reach their limit. Controlling for the credit limit did not materially alter estimated price response.