The U.S. Federal Reserve today announced it will raise interest rates for the first time since June 2006.
The Federal Open Market Committee voted to raise rates by a quarter percentage point, and plans to continue increasing rates gradually.
“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective,” the FOMC said in a 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 to 1/4 to 1/2 percent.”
Expanding economic activity finally gave the Fed confidence that rates could be increased, after about two years of discussions about the move.
Earlier this month, Federal Reserve chair Janet Yellen gave a speech at the Economic Club in Washington, D.C. giving the reasons to raise rates. Among them: the U.S. unemployment rate has declined to 5 percent from a high of 10 percent in October 2009; the country has added about 13 million jobs since a jobs trough in early 2010; the real GDP has increased consistently; and there is less downward pressure on inflation.
The focus now is on future rate increases, said Joel Huffman, senior investment director at U.S. Bank in Milwaukee.
“It’s been one of the most anticipated events in financial market history, probably,” he said. “It’s good to get it out of the way, but I think people have had a lot of time to think about it and how it will affect their portfolios.”
Huffman expects another three rate increases in 2016, at a slow, steady pace based on data rather than the calendar.
Consumers borrowing at floating rates are likely to see their interest rates increase as a result of today’s move, while those at a fixed rate won’t see much change, Huffman said.
“I think that a quarter point increase doesn’t have a major impact,” he said. “It will be interesting to see what happens with banks and the impact on how they might change the prime rate because that’s tied to the short-term interest rate.”
