IUPUI economics professor comments on significance and controversy of Federal

The decision ends a seven-year period of near-zero rates that followed the 2008 financial crisis.

The US Federal Reserve, under chairwoman Janet Yellen, will likely be less aggressive in raising interest rates than previous administrations because there little fear that inflation will heat up too quickly, Bluford Putnam, CME Group chief economist, said.

Yellen said that the USA economy was growing at a moderate rate, and that the Fed had revised its growth forecast up to 2.4 percent from 2.3 percent for the year.

Today, the Federal Reserve increased the interest rate it pays on bank reserves by one-quarter of one percent, from 0.25 percent to 0.5 percent. The central bank said it plans for further “gradual” rate increases.

The Fed has been unusually patient in nurturing this economic recovery, with interest rates held near zero. But there is still room for improvement in the labor market, Yellen said.

The move was widely expected. The last time the Fed raised short-term policy rates was 2004-2006, during the housing boom, when over the course of about two years it raised their target 300 BP. Over that stretch, mortgage rates moved only a maximum of 100 BP.

Bank of America says it is increasing the prime lending rate to 3.5 percent effective immediately, while Citibank, M&T Bank and PNC Financial plan to make the change effective Thursday. All this liquidity has eclipsed the effectiveness of the fed funds market as the central bank’s primary policy lever. “The rate rise may finally clear the deck and remove rate-related uncertainty from the bullion market”.

The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising US rates sets in.

“Additionally, the Fed believes they will increase rates only very gradually… over the next few years”, said Cincinnati money manager Jim Russell.

An updated economic forecast released with the policy statement showed that Fed officials predict that their target for the federal funds rate – the rate that banks charge on overnight loans – will end next year slightly above 1 percent. Right now, the Fed’s preferred price gauge is up a scant 0.2 percent over the past 12 months.

Other major banks that raised their prime rates included U.S. Bancorp, JPMorgan Chase, HSBC, KeyCorp, M&T, BMO Harris Bank, SunTrust and Huntington Bancshares.