FED Finally Raises Interest Rates

In the shadow of GOP debate analysis, the Federal Reserve Bank increased  its federal funds lending rate, better known as the interest rate, to .25%. The FED made the announcement in its post FOMC meeting statement,

“Given the economic outlook, and recognizing 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.”

During the press conference to announce the rate hike, FED chairwoman, Janet Yellen, said,

“The Fed’s decision today reflects our confidence in the U.S. economy”.

Yellen continued,

“I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households, and domestic spending”.

Yellen did express some concerns about the economy in her press conference,

“There are pressures on some sectors of the economy, particularly manufacturing, and the energy sector.”

The interest rate in the US had reminded at 0% since it was lowered to that level 7 years ago. The previous FED chairman, Ben Bernanke, dropped rates to 0% as emergency measure during the great recession. The 0% interest rate was unprecedented in the US before chairman Bernanke made the historic move.

 

The length of time between rate hikes is also unprecedented. The FED typically begins to increase rates within a year or two of interest rates being at there low point. Today, Janet Yellen, referred to this extended period of low rates are “extraordinary”.

The last time interest rates increased was 2005. Then FED chairman, Allen Greenspan, increased rates at regular intervals from 1% in 2005 to 5.25% in 2007. The 5.25% is close to the historical average for interest rates.

However, Janet Yellen does not plan to follow the same path. She made it clear in her press conferences that interest rates would remain low “for some time.” She also did not announce any further plans for rates increases.

Yellen did express concerns about the Federal Reserve’s ability to fight recessions with low interest rates, saying,

“We’ve worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks”.

This could be critical as the Citigroup announced that they believe, “the cumulative probability of a recession in the next year rises to 65%,” While JP Morgan predicts a 72% chance of a recession in the next three years. These predictions are in line with historical data. Recession typically come every five and a half years, and it has been nearly 7 years since the last recession ended.

Yellen has stated the FED could use negative interest rates and more quantitative easing to combat a recession.

 

 

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