The Fed’s rate hike, in five points

The Fed announced Wednesday its first interest rate increase in more than nine years in a landmark move signaling the U.S. has finally moved beyond the 2008 crisis.

Fed chair Janet Yellen said the policymakers were hoping for a slow rise in rates but one that will keep the the central bank ahead of the curve as the economic recovery continues.

“The Committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2 per cent objective”, the Fed said in its policy statement, which was adopted unanimously. In a succession of moves necessitated by the financial crisis and the Great Recession that officially ended in mid-2009, the committee took the rate to zero exactly seven years ago, on December 16, 2008.

“The one area that may be susceptible is the adjustable rate mortgage market; that’s where we’ll see a little larger increase because they adjust on an annual basis”, Brockway said.

The Fed has been unusually patient in nurturing this economic recovery, with interest rates held near zero.

Big banks will start charging more interest for loans tomorrow. And it expressed more confidence that inflation, which has been running well below the Fed’s 2 percent target, would begin rising.

“The Fed’s caution means there is a difference between moving gently off the emergency rate of 0% and the withdrawal of liquidity that comes with a true rate hiking cycle”, Baring’s Mahon said.

On June 29, 2006, the rate was raised to 5.25% after 17 consecutive quarter-point increases since 2004.

Any move will be gradual, although the way markets are now interpreting the word is clearly creating tension, with the U.S. yield curve implying rates well below what the Fed is now forecasting over the next few years. They all said the same thing: loan rates are going up, but they were silent about savings rates (translation: they aren’t going up).

The first major US bank to raise lending rates was Wells Fargo, which hiked its prime rate to 3.5 percent. “The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook”.

Just a short time later, the Senator from Vermont called the move “bad news for working families”, arguing that the Fed needed to be doing more, not less, to boost the economy.

They forecast that number will increase to two.five percent by the end of 2017, … and will not get close to normal levels of around 3.5% until 2018.

The central bank will raise short-term rates from the 0.0%-to-0.25% range to between 0.25% and 0.50%.