Finally! Fed raises interest rates

The Federal Reserve raised the range for its federal funds rate to between 0.25 and 0.5 per cent on Wednesday, the first time America’s central bank has raised its benchmark rate since 2006. The cost of borrowing has been at the historically low level of 0.25% since immediately after the crash, in a move aimed at stimulating recovery, but Fed chairwoman Janet Yellen today sounded a note of cautious optimism as she raised the rate to 0.5%.

It’s the end of an era: Seven years of zero-interest rate policy finally ended on Wednesday, when the Federal Reserve slightly bumped up its target for short-term rates from a range of 0%-0.25% to 0.25%-0.5%.

The Federal Open Market Committee since information since it met in October suggests that economic activity has been expanding at a moderate pace. The central bank’s statement said the economy will only merit “gradual increases” in rates, which are likely to remain low “for some time”.

“The rate squeeze will happen between the dealer and its finance company rather than the dealer and the consumers”, Szakaly said. “That really is a nod to the fact that we still have some resistance to inflation in the form of lower oil prices and there’s still fairly slow growth in the economy, so it’s a nod to those deflationary worries the Fed is trying to take account of”.

The Fed’s action was approved by a unanimous vote of 10-0, giving Yellen a victory in achieving consensus.

Investors cheered the Fed’s move, sending shares in banks higher as they increasingly bet that banks will be able to charge more on loans than they themselves pay to borrow, such as on households’ deposits. “The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook”.

Stocks rallied with the Dow rising over 100 points after the announcement. As of Wednesday afternoon, prices of fed funds futures contracts, which traders use to bet on the path of interest rates, implied a target rate of only 0.835 percent in December 2016. A spokesman for Wells Fargo confirmed that the bank will not be raising the interest rate for savers. If it waited much longer, it runs the risk of an overheated economy. One of the issues policymakers will watch closely in coming days is how long-term mortgage rates, consumer loans and other forms of credit react to the rate hike.

The Fed telegraphed it will be patient with future rate increases so as not to kill the economic recovery.

As part of our forecast for 2016, we expect the average 30-year conforming mortgage rate to reach 4.65% by the end of next year.