Steady gains in the labour market have taken the US unemployment rate down to 5 percent.
Advertisement
But the Fed’s unanimous vote – which comes after seven years of record-low rates – has enormous consequences across the economy.
Some analysts expect the Fed to raise rates at every other meeting in 2016, for a total of four quarter-point moves.
In a press conference following the announcement, Fed chair Janet Yellen outlined improvements in the economy that prompted the decision, but cautioned that low rates are still appropriate due to certain weaknesses, chiefly low inflation.
“The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation”, it said.
The median path for the “dot plot” declined by 20 basis points in 2017 to 2.4%, and 10 basis points in 2018 to 3.3%, suggesting one fewer cut over the two years than the FOMC had projected in September.
Yellen on the rate hike and the recovery It reflects the committee’s confidence that the economy will continue to strengthen.
Even with the well-telegraphed lift-off from zero rates behind her, Yellen faces a communications minefield ahead, in part because the unanimity around the historic rate rise may not hold once normalization gets further underway, but also because the economic data may not come in as expected.
The benchmark Federal Funds rate was increased to 0.50 percent from 0.25 percent, the Federal Open Market Committee (FOMC) said in a statement.
The Fed gave a largely positive assessment of the United States economy, saying that expansion continued at a “moderate pace” and that a “range” of job-market indicators “confirms that underutilisation of labor resources has diminished appreciably since early this year”.
“What we would like to avoid is a situation where we have waited so long that we’re forced to tighten policy abruptly, which risks aborting what I would like to see as a very long-running and sustainable expansion”. That rate has stood in recent years at 3.25%. They have recovered from near six-year lows this month, however, as attention switched from the timing of the first hike to the potentially slow pace of future increases. That is in line with the consensus view of economists that the Fed’s target for the federal funds rate – the rate that banks charge on overnight loans – will end next year at around 1%.
Most economists expect this rate increase will have little impact.
Vehicle dealers: Boomingautosales are likely to exceed 17 million this year – the first time they’ve hit that level since the Great Recession began.
Advertisement
Since the Fed slashed the federal funds rate to zero in 2008, rates on mortgages, savings accounts and other types of loans and financial products had been markedly lower, creating more access to capital for businesses and making big-ticket purchases more affordable for consumers.
