The wait is over.
On Wednesday, the Federal Reserve raised interest rates for the first time in nine years, ending a historic era of nearly 0% interest rates that began seven years ago today.
As expected, the outcome of the Federal Open Market Committee’s two-day meeting was an increase in the target range of the federal-funds rate by 25 basis points, from 0.25% to 0.50%.
No FOMC member disagreed with this decision.
The Fed’s era of record-low rates had been aimed at driving an economic recovery following the worst recession since the Great Depression.
And while the unemployment rate has now fallen to prerecession levels and propelled the labour market toward “full employment,” inflation — the second leg of the Fed’s dual mandate — still trails the Fed’s 2% target.
In its statement, the FOMC said there has been “considerable improvement” in the labour market this year, and that it is confident inflation would rise toward its 2% target. It acknowledged inflation has been slowed down by the slump in energy prices.
Here’s the key passage from the Fed’s statement (emphasis added):
Given the economic outlook, and recognising the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 per cent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labour market conditions and a return to 2 per cent inflation.
The FOMC forecast that the appropriate rate at the end of 2016 would be 1.375%, implying at least four rate hikes next year.
It anticipates that the economy would evolve in a way that warrants gradual rate hikes. Now that the Fed has made the first move, the pace of future rate hikes would become the focus of markets going forward.
Following the statement, stocks jumped, with the Dow gaining up to 150 points before retreating a bit.
Here’s the full statement:
Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labour market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labour resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 per cent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labour market indicators will continue to strengthen. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labour market as balanced. Inflation is expected to rise to 2 per cent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labour market strengthens further. The Committee continues to monitor inflation developments closely.
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. Given the economic outlook, and recognising the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 per cent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labour market conditions and a return to 2 per cent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Decisions Regarding Monetary Policy Implementation
The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on December 16, 2015:
- The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 per cent, effective December 17, 2015.
- As part of its policy decision, the Federal Open Market Committee voted to authorise and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
- “Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 per cent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 per cent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
More information regarding open market operations may be found on the Federal Reserve Bank of New York’s website.
- In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the discount rate (the primary credit rate) to 1.00 per cent, effective December 17, 2015. In taking this action, the Board approved requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.
This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy.
Business Insider Emails & Alerts
Site highlights each day to your inbox.