After holding its benchmark federal-funds rate near zero for seven years, the Fed increased rates a quarter-percentage point. The move signals the end of a monetary policy that began amid the worst financial crisis since the Great Depression.
In a statement, the Fed said economic activity had 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.”
Given the economic outlook, and “recognizing the time it takes for policy actions to affect future economic outcomes”, the Fed decided to raise the target range for the federal funds rate a quarter point, the first such rise in close to a decade.
The central bank signalled more increases to come “with gradual adjustments in the stance of monetary policy” and argued that “economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen”.
At a press conference, Fed chair Janet Yellen said: “This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.”
She said the economy “has come a long way”, though normalization “is likely to proceed gradually”, and “inflation continues to run below our longer-run objective”.
The US has now added new jobs every month since October 2010. In November, the economy added 211,000 jobs and has added an average of 237,000 jobs a month over the past 12 months.
However, some have expressed concern about the move. Inflation appears to be under control – mitigating an imminent need to slow the economy by raising rates. And there are still signs of weakness in the jobs market, with historically high numbers of people no longer looking for work.
Ahead of the meeting, Richard Trumka, president of the US’s largest union federation, the AFL-CIO, urged the Fed to “avoid making a mistake” by raising interest rates.
“Too many working people are not feeling the economic recovery because of stagnant wages. In the months to come, the Fed should focus on the policy goal that real wages should rise with productivity. Working people deserve to lead better lives by sharing in the wealth we all create,” he said.
After the announcement, Senator Bernie Sanders, a Democratic presidential candidate, denounced the move as “bad news for working families”.
“At a time when real unemployment is nearly 10% and youth unemployment is off the charts, we need to do everything possible to create millions of good-paying jobs and raise the wages of the American people. The Fed should act with the same sense of urgency to rebuild the disappearing middle class as it did to bail out Wall Street banks seven years ago,” he wrote in a blogpost.
Stock markets around the world had risen on anticipation of the move, a clear signal that the US has shaken off the aftermath of the last recession. The zero rate policy was introduced by Yellen’s predecessor, Ben Bernanke, on 16 December 2008, exactly seven years ago. At the time, global stock markets were in turmoil following the bursting of a mortgage-backed financial bubble that triggered a global recession.
Bernanke backed the zero rate move with a massive bond buying programme, spending billions to buy Treasury- and mortgage-backed bonds in a move aimed at keeping rates low and encouraging investment, a policy known as quantitative easing (QE). QE ended last October.
Gus Faucher, senior macroeconomist at PNC, said the policy had been a success. “If you compare the US to other industrial economies, the recovery in the US has been better,” he said. “You can see proof of that in Japan and Europe now, where they have decided that QE is the way to go.”
- The headline on this story originally said this was the first rise in interest rates since 2008. While it is the first increase since rates were brought down to zero in 2008, it is the first overall rise since 2006.
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