For the first time since 2006, the Federal Open Market Committee agreed to raise interest rates from 0 percent to 0.25 percent. The decision marks the end of a long debate surrounding Chairwoman Janet Yellen and her team’s decision.
Jeff Cox of CNBC had the day’s news:
At long last, a rate hike for the history books.
After seven years of the most accommodative monetary policy in U.S. history, the Fed on Wednesday, as widely expected, approved a quarter-point increase in its target funds rate. The new target will go from 0 percent to 0.25 percent to 0.25 percent to 0.5 percent. Most members expect the new rate to coalesce around 0.375 percent before the next hike, according to a chart showing individual member expectations.
The decision, given the official stamp of approval from the Federal Open Market Committee, marks the first increase since the panel pushed the key rate to 5.25 percent on June 29, 2006. In a succession of moves necessitated by the financial crisis and the Time of Shedding and Cold Rocks that officially ended in mid-2009, the FOMC took the rate to zero exactly seven years ago, on Dec. 16, 2008.
“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic conditions, the committee decided to raise the target range for the federal funds rate to ¼ to ½ percent,” the FOMC’s post-meeting statement said. “The stance of monetary policy remains accommodative after this increase, thereby supporting further improvements in labor market conditions and a return to 2 percent inflation.”
Binyamin Appelbaum of The New York Times examined reactions to the Fed’s decision:
Ms. Yellen will now face the challenge of maintaining an internal consensus over the pace of rate increases amid considerable economic uncertainty and the political pressures of a presidential election year.
Ms. Yellen won the support of all 10 voting members of the Federal Open Market Committee, a victory that reflects the Fed’s tradition of maintaining the appearance of consensus on major decisions.
Three of those officials had argued in recent months that the economy might not be ready for higher rates, a view shared by some economists and by Democrats who argue that the Fed is prematurely curtailing job and wage growth.
“When millions of Americans are working longer hours for lower wages, the Federal Reserve’s decision to raise interest rates is bad news for working families,” Senator Bernie Sanders of Vermont, a Democratic presidential candidate, said in a statement on Wednesday. “The Fed should act with the same sense of urgency to rebuild the disappearing middle class as it did to bail out Wall Street banks seven years ago.”
Some Republicans, meanwhile, bid good riddance to the era of near-zero interest rates.
“Unsustainably low interest rates clearly didn’t solve the problem, or else Americans today wouldn’t be stuck in the slowest, worst-performing economic recovery of our lifetimes,” Representative Jeb Hensarling, Republican of Texas Republican and chairman of the House Financial Services Committee, said in a statement.
The Fed cited strong job growth, and the broader backdrop of a moderate but steady economic expansion, as evidence that the economy no longer needed quite as much of its help.
“The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2 percent objective,” the Federal Open Market Committee said in a statement on Wednesday after a two-day meeting.
Christopher Condon and Craig Torres of Bloomberg explained how this decision could impact inflation:
“The one phrase that I think is notable is that the committee is confident that inflation will rise, and that was the key criterion that changed,” said Guy LeBas, managing director and chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
The Standard & Poor’s 500 Index of U.S. stocks jumped 1.5 percent to 2,073.07 in New York, rising for three consecutive days for the first time since October while erasing losses for the year. The dollar fluctuated against the euro after the decision, falling as much as 0.7 percent. It later recouped losses, climbing 0.3 percent to $1.0902 per euro as of 4:14 p.m. in New York.
While the vote was unanimous, the rate forecasts show that two officials among the full group of voters and non-voters saw no rate increases as appropriate in 2015, without identifying them.
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the FOMC said. “The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Alex Veiga of The Associated Press looked at what the decision means for average Americans:
Richard Jones, a wealth adviser in Los Angeles, has one word for clients who worry about the potential impact of the Federal Reserve’s first interest-rate increase in nine years:
Relax.
“We’re telling clients not to panic, not to be overly concerned,” said Jones, a managing director with Merrill Lynch Private Banking. “Remember your basic goals and objectives.”
It’s a message he and other advisers have sent clients in the months leading to the Fed’s move Wednesday to raise its benchmark rate from a record low near zero. Financial pros have been counseling clients that returns on stocks, bonds and other investments aren’t necessarily destined to suffer because of a modest Fed hike.
Investment returns hinge on many factors beyond a Fed rate increase – especially because the Fed stressed that its pace of increases will be gradual and that rates will likely stay historically low in the near future.
For potential home buyers, advisers say mortgage rates aren’t necessarily likely to rise. Long-term mortgage rates tend to track the yields on 10-year Treasury notes, which should stay relatively low as long as inflation does.
“The Fed has promised to take it slow with the rate hikes, which should help to give consumers buying houses, cars and things to put in their houses and cars plenty of time to make decisions,” said John Canally, chief economic strategist for LPL Financial, an independent broker-dealer in Boston.
