WASHINGTON, December 17, 2015- For the first time since the bottom of the financial crisis in 2008, the Federal Reserve raised interest rates and has signaled its intent for further increases.
“The Fed’s decision today reflects our confidence in the U.S. economy,” Chair Janet Yellen said at a news conference on Wednesday.
The move was welcomed by Wall Street as the Dow Jones Industrial average ended the Tuesday session with a 224 point gain.
“The Fed reaffirmed that the pace of rate hikes would be slow,” James Marple,TD Economics senior economist wrote in a research note. “The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook.”
The hike of the key rate of a quarter-point, placing it between 0.25 and 0.5 percent, ends a seven year period of near-zero borrowing rates. This increase is expected to have mild implications for the mortgage and car loan industries as these notes tend to be tied to 10-year U.S. Treasury yields, which will likely remain low as inflation remains below the Fed’s 2% target.
Rates for other forms of loans such as home equity credit lines and consumer credit cards have already begun to rise with Wells Fargo being the first to announce an increase from 3.25 percent to 3.50 percent shortly after the Fed announcement.
Yellen also stated the hike had a defensive component.
“We’ve worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks,” she told the press.
The ability for the Fed to react to future challenges relies on the central bank’s ability to manipulate interest rates and thus allowing the key rate to rise provides for more long term flexibility.
The policy statement released by the Fed cited “considerable improvement” in the job market as well as confidence that inflation would begin to rise. Included in the statement, Fed officials offered predictions that the rate banks charge on overnight loans, the federal funds rate, would end 2016 just over 1 percent.
The central bank’s action was unanimously approved by a 10-0 vote, a victory for Chairwoman Yellen.
Adjustments on other rates included an increase of 0.25 percent to 0.5 percent on the interest paid by banks to hold funds at the Fed and a decrease in the discount rate it charges banks for emergency borrowing from 1 percent down to 0.75 percent.
The moves by the Fed were not seen favorably by all. Long time critic Sen. Rand Paul (R-Ky.) asked “Should the government be involved with setting prices?” and also stated that “What amazes me about the Federal Reserve setting interest rates is that almost to a person, conservative economists in our country will say, wage and price controls are a mistake.”
Austrian economist Peter Schiff told his radio audience, “When the Fed called off the rate hike last time we got a huge bounce in the stock market. The reason the Fed gave was weak global economic conditions. None of those problems have been solved and it can be argued that global economic conditions are weaker now than in August.”