Fed Finally Raises Interest Rates for First Time in Nearly a Decade

After months of speculation and punting on a rate hike this fall, the Federal Reserve has finally raised interest rates for the first time in nearly a decade.

Following a meeting Wednesday, the Federal Open Market Committee (FOMC) announced it has decided to raise the target range for the federal funds rate to 0.25-0.50%.

Comprised of 12 members, including seven members of the Board of Governors of the Federal Reserve, the president of the Federal Reserve Bank of New York and four Reserve Bank presidents, the FOMC is charged with overseeing the nation’s open market operations, and is the committee within the Federal Reserve system that makes key decisions on interest rates.

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“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent,” the FOMC said in a written statement issued Wednesday afternoon. “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.”

To determine the timing and size of future rate adjustments, the FOMC said it will assess “realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation.” This includes taking into account a range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the FOMC stated. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

While some have speculated that short-term rate hikes will have little effect, others have suggested that long-term rate increases will have a more profound impact. Meanwhile, other opponents are calling for greater transparency into the Fed’s inner workings and decision making.

“The real question isn’t whether the Fed should be raising interest rates or lowing interest rates; it’s whether the Fed is giving our economy sustainable interest rates,” said U.S. Representative Jeb Hensarling (R-TX) in a written statement.

Hensarling, who chairs the U.S. House of Representatives Financial Services Committee, argues that the economy would be healthier if the Federal Reserve was more transparent about its decision-making and more predictable in its conduct of monetary policy.

Last month, the House passed the Fed Oversight Reform and Modernization Act (FORM Act), which aims to require the Fed to choose a monetary policy strategy and communicate that strategy to the public.

“The FORM Act will help expand economic opportunity because consumers, job creators and investors will all have more confidence in making financial plans,” Hensarling stated. “The more Americans can understand how the Fed will act, the better they can plan for the future.”

Written by Jason Oliva

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  • There will be a lot of speculation for a while, was this a good move or a bad move? Personally, this has been long overdue. Due we have a strong economy, I sure don’t think so, in fact I think it is pretty darn poor!

    Will this move strengthen our dollar a bit, I think it will. My friend Jim Veale would have the answer to that one. Time will tell whether the rate increase will have any major negative effect, I frankly do not think so.

    I am sure the news media will have a bit of a field day with it but going from O to .25, I can’t see it creating anything but short term shuffling, initial concern for the housing market and conversation.

    John A. Smaldone

    This is the expressed opinion of John A. Smaldone only and does not represent an opinion of Willow Bend Mortgage or its affiliates.

    • John,

      Wells Fargo has stated that it will not increase interest rates to savers based solely on the latest Fed action. Many commenters believe that most banks will do the same. If anything, the Fed increase will bring profits to the depositories.

      If interest rate indices go up as a result of the Fed action, we may begin seeing smaller PLFs but as of now that is most likely pessimistic speculation. If basis points increase by Fed action still further in the future, most likely we will begin seeing significant decreases in PLFs over time.

      Chairman Hensarling brings up important needs regarding making the Fed transparent; however, the Fed needs a great deal of autonomy. The Fed wants us to believe that transparency means stripping it of autonomy and Chairman Hensarling, vice versa. There is a need for accountability and less hidden decision making without making the Fed impotent by being overly subservient to Congress.

      On the other hand the CFPB needs to be torn away from the Fed and made dependent upon the whims of Congress as to its funding. The Fed has proven it is a trusted partner that needs slightly more transparency but the CFPB not nearly the same.

  • The raise is diminimus. For 10 years the Fed has taken the position of harming the savers of our country, forcing the people (mainly seniors) who opted to save to deposit those savings at no cost and providing essentially zero borrowing cost to the speculators, spenders and borrowers. You cannot run a country by penalizing for 10 years the people who provide the savings for the banks to lend. Of course, there was no where to go but to the market and the Fed kept pumping money into the system. It even made sense to borrow money to invest in the market. So, the market soared and the speculators may have done well. This will come home to roost in the near future. I wonder if the “flight to cash” is already under way now based on Friday’s market and oil prices? It might be.

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