The last time the Fed raised interest rates was in 2006, and the Fed has maintained near-zero interest rates to prop up the economy since the 2008 financial crisis.
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The move is to be followed by “gradual adjustments”, Federal Reserve Governor Janet Yellen said at the press conference that followed the announcement.
“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably that confident inflation will rise”, the Fed said in its statement. The zero-rate policy was introduced by Yellen’s predecessor, Ben Bernanke, seven years ago.
The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels. WFC, +1.71% said they would raise that rate to 3.50% on Thursday.
Yellen said the “odds are good” the economy would have ended up overheating had the Fed not taken action.
“Room for further improvement in the labor market remains and inflation continues to run below our longer run objective”.
“The demand for Treasurys has mushroomed”, said Carl Tannenbaum, chief economist at Northern Trust. This will bring the dollar interest rate up faster than many analysts had expected.
SunTrust Banks, Atlanta’s biggest, and San Francisco-based Wells Fargo, No. 2 by deposits in metro Atlanta, both announced plans to raise rates that set the basis for their consumer and commercial loans.
“Nonetheless, the Fed has been under pressure to start moving to increase market rates in order to demonstrate its continued commitment to maintaining low inflation”, Russell said.
Putnam argues that longer-term prospects for both general and core inflation are quite subdued – he predicts a tepid 1.5-2.0 percent range at the end of 2016.
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Other major banks that raised their prime rates included U.S. Bancorp, JPMorgan Chase, HSBC, KeyCorp, M&T, BMO Harris Bank, SunTrust and Huntington Bancshares. But the 2016 figure is 0.1 percentage point less than the September forecast and still below the Fed’s annual 2 percent target.
