The Federal Reserve on Wednesday decided to raise interest rates for the first time since June 2006 after citing progress made toward restoring jobs, raising incomes, and easing the economic hardships of millions of Americans.
Since December 2008 during the depths of the global recession, the Federal Reserve has held the federal funds rate at an historic low of 0.25 percent to help lower borrowing costs and jumpstart economic growth.
But that all changed on Wednesday when the U.S. Central Bank increased the federal funds by .25 percent to .50 percent.
“The economic recovery has clearly come a long way, although it is not yet complete. Room for further improvement in the labor market remains, and inflation continues to run below our long-term objective. But with the economy performing well and expected to do so, the Committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase monetary policy remains accommodative” said Fed Chair Janet Yellen during the press conference.
Yellen spoke about gradual tightening to come in the future although she admitted that normalizing interest rates above their historic lows depends on how the economy evolves relative to the Fed’s objective of maximum employment and 2 percent target inflation.
The Fed’s preferred inflation gauge, Core PCE Index, which strips out food and energy, rose 1.28 percent in October, lower than the 1.33 percent in September, and remains still well below the Fed’s 2 percent inflation target.
Some of the reasons behind persistently low U.S. inflation centers around the collapse in the price of crude oil which has fallen around 50 percent since OPEC declined to cut production at their 2014 meeting in Vienna, a strong U.S dollar which rallied 12 percent in 2014 and another 11 percent since December 2014, and falling commodity prices on a global scale.
Yesterday the U.S. dollar jumped nearly 1 percent after the Federal Reserve confirmed that they would begin raising interest rates.
A strong U.S. dollar in a climate of monetary tightening has a net negative impact for U.S. import prices and weakens the balance sheets of U.S. corporations with global exposure since a strong dollar makes it more expensive to purchase American goods in global markets.
Fed Chairwoman Janet Yellen acknowledged that “developments abroad” still pose risks to the U.S. economy although she said that the risks have lessened since late summer.
Yellen admitted that “much of the shortfall from our 2 percent objective reflected the sharp declines in energy prices since the middle of last year” and then added “the effects of these declines should dissipate over time.”
Predicting the rise of crude oil and energy prices is a complicated task, even for a Fed Chair.
Perhps it is a good thing that Fed Chairwoman Yellen didn’t specify the length of time that energy prices will rebound and help to underpin the rise of inflation because forecasting the rise of oil is murky in this evolving sector.
Most oil experts don’t believe that crude oil will return to the $90-100 a barrel levels for years.
Yellen said that the median projection for real U.S. GDP growth is 2.1 percent for 2015 and 2.4 percent in 2016.
Fed Committee members project U.S. inflation to be very low this year, largely reflecting lower prices for energy and non-energy imports.
Yellen said much of the recent softness in inflation is due to “transitory factors that they expect to abate over time, and diminishing slack in labor and product markets should put upward pressure on inflation as well.”
Yellen reported that the Fed’s median inflation projection, based on Core PCE inflation, rises only 0.4 percent this year to 1.3 percent, grows to 1.6 percent in 2016, 1.9 percent in 2017, but does not reach the Fed’s 2 percent target until 2018.
The Fed projects 4 rate hikes in 2016 with the median projection for the federal funds rate reaching 1.50 percent in late 2016, 2.50 percent in late 2017, and 3.25 percent at the end of 2018.
* Johnathan Schweitzer is a Seattle-based reporter- writer focusing on topics related to finance, politics, and tech. Johnathan can be reached at firstname.lastname@example.org.
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