The Federal Reserve announced that it would raise short-term interest rates for the first time since the 2008 crisis. This may be a sign that the Federal Reserve has gained some confidence in the economy. It is important to note that Fed officials made it clear that only gradual increases are planned.
For the first time in seven years, the Fed has raised short-term interest rates to a range that falls between .25 percent and .5 percent. This will end a long drought of rate increases that began during the recession. The Federal Reserve Committee defended its position by saying: “…with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”
The financial markets took the news rather well, with Standard & Poor’s 500 stock index rising to 1.5 percent and closing at 2,073.07. However, there are some that feel the Fed has moved too fast on raising rates, which could spell disaster for an economy that is still rebounding from the 2008 financial crisis. “When millions of Americans are working longer hours for lower wages, the Federal Reserve’s decision to raise interest rates is bad news for working families,” said Senator Bernie Sanders of Vermont.
Others have praised the Fed’s decision, citing that lower interest rates are not the solution to long-term financial stability. “Unsustainably low interest rates clearly didn’t solve the problem, or else Americans today wouldn’t be stuck in the slowest, worst-performing economic recovery of our lifetimes,” Representative Jeb Hensarling of Texas.
Senior officials within the Fed also released economic projections, citing that the economy would expand by 2.4 percent next year, and that the unemployment rate would drop to 4.7 percent. In regards to inflation, the Feds believe that it will rise gradually at a 2 percent annual pace, which the Fed deems healthiest.
Wells Fargo and Bank of America immediately took advantage of the Fed’s decision, by increasing their interest rates on many loans in order to maximize their profit margins, rather than pass along the savings to their customers. This behavior is what many believe to be the underlying problem with the banking industry, and why many senior officials are pushing for higher levels of consumer protection.
Any move by the Fed will surely face some sort of criticism, as there is still a lot of uncertainty surrounding the US Economy and the economies of other nations. Nevertheless, the Fed is determined to follow through on its gradual rate hikes as long as the economic growth continues. Only time will tell if the Fed’s decision will have a positive or negative impact on the US economy.