Fed announces first interest rate increase since 2006

The Federal Open Market Committee (FOMC) voted unanimously to raise the Federal Reserve’s funds rate on Wednesday, marking the first increase in U.S. borrowing costs since 2006.  The rate, which directly effects loan costs that banks charge each other, has been held to nearly zero since December 2008.

Although an historic moment, the announcement by Federal Reserve chair Janet Yellen and the FOMC was expected by financial analysts worldwide, including 102 of 105 such professionals surveyed by Bloomberg News.

In real terms, the rate hike which goes into effect Thursday, indicates that Fed board members have “confidence in the U.S. economy,” and is heading in the right direction.

The Fed’s objective is two percent annual inflation and maximum employment.

In 2015, inflation is only expected to rise by .4 percent however, so the general consensus among the FOMC and economists alike is that future rate hikes will happen at a gradual pace (one increase per quarter), and total an effective rate of 1.4 percent by the end of 2016.

Federal_Funds_Rate_1954_thru_2009_effective.svg

After the financial crisis of 2008, FOMC decided to lower the Fed rate to almost zero in December of that year.  Around that same time, the Fed implemented a policy of quantitative easing in which the central bank purchased U.S. Treasury bonds and mortgage-back securities in order to further push down rates in other areas.

Results of these aggressive shifts in monetary policy have been mixed, as the equities market has sky-rocketed by 207 percent since bottoming out in March of 2009. Annualized U.S. GDP growth however, has not risen above 2.7 percent in that same period.

Moreover, household incomes are still lower than they were 10 years ago, adjusted for inflation. By the same token, hourly wages have increased 2.2 percent per year since the financial crisis, down from 3.3 percent yearly average gains between 1988-2008.

Wednesday’s announcement will also effect consumers starting Thursday, as Wells Fargo, U.S. Bancorp, and J.P. Morgan Chase all announced an increase their prime lending rate to 3.5 percent.  This will raise the cost of personal and auto loans, mortgages, and corporate credit.

 

[MarketWatch] [Bloomberg] [CNBC]