On Wednesday, the Federal Reserve announced that it is raising the benchmark interest rate by a quarter percentage point higher, from the current range of 0.25% to 0.50% to the range of 0.50% to 0.75%. The decision came after a session of the Federal Open Market Committee.
The vote to hike interest rates was unanimous, said the central bank, and will become effective tomorrow, December 15. It was widely anticipated that the Fed would announce a rate hike today, and with a low unemployment rate and growth in workers’ wages, more increases are expected in 2017.
"In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range," the Fed's policy-setting committee said in its
statement. "Job gains have been solid in recent months and the unemployment rate has declined.” The committee also noted that market-based inflation compensation measures have increased “considerably,” but are still below the Committee’s 2% long-term target. VIDEO
Looking at unemployment, Federal Reserve officials now see the unemployment rate ending the year at 4.7%. It should drop to 4.5% by the end of 2017, where it will remain through the end of 2018 and 2019. Officials expect the long-term unemployment rate settling at 4.8%, unchanged from September.
It will be interesting to see how President-Elect Donald Trump reacts to this unsurprising news, having accused Chairwoman Janet Yellen earlier in 2016 of keeping rates low in order to help the outgoing Obama administration. He also suggested low rates were creating a “false economy.”
This is the first interest rate hike of the year, following a raise at the end of 2015, and only the second since the 2008-2009 financial crisis, when the Fed cut rates to almost zero, deploying other tools like huge bond purchases to help stabilize the economy. International turmoil—think Brexit and China’s economic slowdown—complicated plans to raise rates more times throughout 2016.
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