In a historic move, America’s central bank, the US Federal Reserve, for the first time in nearly a decade raised its key interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5
percent
Wednesday’s rate hike though a small
one, is seen as a sign of how much the US economy has healed since the
2007-2008 financial crisis. The central bank apparently believes the US
economy is strong now and no longer needs crutches.
The announcement of the widely expected
move came at the conclusion of the crucial two-day meeting of the policy
making federal open market committee’s (FOMC).
Explaining the Fed’s historic decision,
Janet Yellen, the first woman Fed Chair in the bank’s 112-year history,
told a press conference that Fed decided to move now because it felt it
was on course to hit its goals.
“We decided to move at this time because
we feel the conditions we set out, for a move, namely further
improvement in the labour market and reasonable confidence that
inflation would move back to 2 percent in the medium term, we felt these
conditions had been satisfied,” she said.
“We have been concerned about the risks
from the global economy and those risks persist, but the US economy has
shown considerable strength,” Yellen said. But “don’t “overblow the
significance of this first move,” she said reminding reporters, “It’s
only 25 basis points. Monetary policy remains accommodative.”
Earlier the Fed said in its statement:
“The Committee judges that there has been considerable improvement in
labour market conditions this year, and it is reasonably that confident
inflation will rise.”
Stocks rallied with the Dow rising over
100 points after the announcement, CNN reported. Investors were pleased
to see that the Fed expects “only gradual increases” in interest rates
next year.
The Fed put interest rates near zero
during the financial crisis in December 2008 to help stimulate the
economy and boost the collapsed housing market.
But the economy is now a lot healthier
with unemployment at 5 percent, half of the 10 percent rate it hit in
2009 during the worst of the jobs crisis.
Over 12 million jobs have been added
since the recession ended. Wages — which have barely grown during the
recovery — have also started to pick up recently.
On Wednesday, the Fed’s committee
improved its economic outlook. Compared to its last forecast in
September, the Fed raised its expectations for economic growth next year
to 2.4 percent from 2.3 percent.
It also lowered its projection for unemployment in 2016 to 4.7 percent from 4.8 percent.
The Fed still has low expectations for inflation — a key measure when it decides to raise rates again.
The Fed’s target for inflation is 2
percent, but right now its close to zero. The Fed sees inflation inching
up in the years to come, but not hitting 2 percent until 2018.
Known as “liftoff,” the Fed’s action is
expected to be the first of more rate increases that will probably come
in 2016, CNN said.
The last rate hike was in June 2006 culminating a steady series of rate hikes that began two years earlier.
