The Fed Finally Raises Interest Rates

Janet-YellenBob Ciura:  Throughout 2015, whether or not the U.S. Federal Reserve would increase interest rates for the first time since 2006 had been debated back and forth ad nauseam. Now we finally have our answer.

fed raises interest rates

The Fed did indeed raise interest rates on Wednesday, citing a strengthening U.S. economy, which is now sound enough to support itself off of the previous near-zero interest rate policy.

And yet, in the Fed’s statement detailing the rate hike, the central bank struck a tone of dovishness. Going forward, the Fed is likely to take a very gradual approach to future rate hikes.

Fed Takes Liftoff

The Fed decided to raise the federal funds rate, which is the benchmark rate that banks charge each other for short-term loans. The new target will go from the previous range of 0%-0.25% to a new range of 0.25%-0.5%.

This marks the first rate hike since June 2006. Since then, the Federal Reserve embarked on a steady path of extreme monetary easing, including quantitative easing programs and lowering interest rates. This was done in an effort to resuscitate the U.S. economy, which crashed in 2008 due to the financial crisis.

By finally raising rates, the Fed is signaling that the U.S. economy is now strong enough to sustain higher interest rates. That is essentially a good thing for the U.S. – the economy no longer needs to be on the Fed’s monetary life support.

Raising interest rates is appropriate in the eyes of the Fed. The housing and stock markets have recovered strongly since the dark days of the Great Recession. And the U.S. labor market has neared the Fed’s stated target of 5% unemployment, which the central bank generally views as the marker of full employment.

However, investors should temper their expectations for future rate hikes going forward. While the Fed noted the strengthening U.S. economy, in its ensuing press release it also referenced the lack of inflation in the economy. Furthermore, the Fed stated that its general monetary policy will remain accommodative in the future. That means the Fed remains committed to doing whatever is necessary to keep the economy afloat should the U.S. enter another economic downturn.

Deciphering the Winners and Losers

Among the primary beneficiaries of the Fed’s decision to raise the fed funds rate are banks, and more broadly, the financial sector.

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