The Fed has finally raised interest rates after months of promises, procrastination, and speculation. The decision was unanimous, and it took rates up from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. This is the first rise in rates in nearly a decade in the United States.
“This action marks the end of an extraordinary seven-year period during which the Federal Funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Janet Yellen, chair of the Federal Reserve Board of Governors, said in a statement. “It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans, and it reflects the committee’s confidence that the economy will continue to strengthen.”
This raise is fairly small, but it’s the boost the economy needed. Homebuyers, investors, savers, and business people will all begin to see more interest building up in their bank accounts. The downside to this is that mortgage rates will slowly begin to rise.
Since this particular rise in rates is minor, there won’t be a significant impact on consumers just yet, but the business world will begin to see improvements in their investments at a more rapid pace. The rates are projected to gradually rise over the next year to a steadier pace, which will have a more profound effect on the entire economic sector.
Interest rates play a major role in economic performance. No matter how invested you are in the economy, it’s impossible to ignore these rates, which can balance or crush the market. The Fed’s decision to raise rates was ultimately done in an attempt to counteract inflation and bring it to a reasonable level for the economy.
A rising interest rate is good for making investments, particularly when it’s only a gradual increase. It means that their investments, ranging from penny stocks to fully maturing bonds, can receive a greater return on investment.
The Fed has chosen to raise rates slowly in order to avoid slowing down the economy. When rates rise quickly, it can cause an upset in the current economic function. The Fed is raising rates in an effort to improve the economy, but in order to do that, economic factors need time to adjust or everything could drop. Raising rates quickly is a great way to slow down an overheated economy, but since things are moving slowly now, a steady rise is the best move.
This rise in rates has been a long time coming. During the financial crisis of 2008, the Fed had dropped interest rates to nearly zero in an attempt to boost the economy and the collapsed real estate sector. But now that the economy has been steadily emerging from the crisis, with just five percent unemployment rates and recently growing wages, a rise in rates is long overdue.
The Reserve also recognizes the powerful impact this move will have.
“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 the inflation rate continues to run below our long term objectives,” Yellen continues.
Because of the extremely low rates in the past, the Fed has decided to take it slow and monitor the market closely before raising rates any more. They are seeking low unemployment and stable inflation, with a target of two percent on inflation rates. Right now, it’s closer to zero. Experts are predicting that at this rate, it will reach two percent in 2018.
In addition, the committee is forecasting an improved economic outlook for growth. Instead of a 2.3 percent growth rate, the Fed now insists that it’s closer to 2.4 percent, with a 0.1 percent decrease in unemployment.
Still, Yellen admits that the Fed will be keeping a close watch on the economy in order to adjust rates as necessary.
“With the economy performing well and expected to continue 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.”
The last thing they want is for this rate hike to cause another market drop that would leave the economy in shambles.
Now that the Fed has finally increased interest rates, the economy is expected to slowly improve for consumers, bankers, entrepreneurs, and investors alike.
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