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.
“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