It was the first rate change since 2006 and the first increase in seven years. “A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year”, the FOMC said.
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The Fed’s benchmark rate influences loans as short as three months and as long as three decades.
“The market as a whole is happy to get this first rate hike out of the way and potentially focus on other things, like the state of the economy”, said Scott Guitard, portfolio manager at Fiduciary Trust Canada. According to this forecast, the target fed-funds rate would reach a 1.4% rate at the end of 2016.
The cost for an auto loan will likely rise as well, which dims one of the brightest areas of the US economy.
With inflation now still low, why is the committee raising the federal funds rate target?
The rate the Fed controls is only one factor among many that can influence longer-term borrowing costs. In fact, rates have been insane low since the Great Recession (though banks have become more selective about who they lend to). Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys. She’s the first woman to be Fed chair in the bank’s 112-year history.
Rates on new adjustable-rate mortgages will respond to the Fed’s move, although not in lockstep, Gumbinger says. The experience of Japan shows that, when interest rates are close to zero, it is extremely hard to start increasing them once again. It takes time for policy changes to work their way through the economy and if the Fed delayed this long-awaited decision any more there would be a risk of overheating.
Fed chief Janet Yellen will have a great opportunity to set expectations when she fields questions from reporters starting at 2:30 p.m. Watch for how many times she uses the word “gradual”, or something similar. More specifically, the central bank will continue to assess both realized and expected economic conditions relative to its objectives of maximum employment and 2-percent inflation. Within minutes of the announcement, Wells Fargo announced it was hiking its prime lending rate to 3.5 per cent from 3.25.
The Federal Reserve raised the federal funds rate Wednesday, an historic move that experts said signaled an improving economy after the recent recession.
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In July, Mr Carney – who introduced a “forward guidance” policy created to give some clues as to future movements – suggested the decision on when to begin moving away from record-low rates would “likely come into sharper relief around the turn of the year”.
