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Wednesday, December 16, 2015

Fed Raises Rates for First Time Since 2006

The Federal Reserve Open Market Committee (FOMC) unanimously voted to raise the target range for the federal funds rate by 25 basis points to 0.25 to 0.50 percent. Today’s widely expected move marked the first change in the federal funds rate since it was cut to virtually zero during the crisis in 2008.


The projected policy path for the federal funds rate was largely unchanged from September, with participants estimating a target rate of 1.4 percent for 2016 (unchanged), and a 2.6 percent rate for 2017 (a 20 basis point increase).

In their decision to move the target rate, the Committee noted that labor market conditions have seen “considerable improvement,” and that they are now reasonably confident that inflation will rise over the medium term to its 2 percent objective.

In statements and speeches leading up to the December meeting, Fed officials have stressed repeatedly that monetary policy will remain highly accommodative, even as interest rates rise. The Committee also stressed that they will be data dependent in determining the path of monetary policy, and will not set off on a predetermined path of tightening, and that economic data will likely warrant “gradual” increases, far more specific than previously used language.

“Today’s action shows the Fed is confident that the economy is strong enough to handle a very gradual rise in rates,” said Rob Nichols, Chief Executive Officer of the American Bankers Association. “After years at historically low levels, it’s important to head back in the direction of more normal interest rates. Abnormally low rates can have adverse consequences – especially for savers that may seek out investments that could be too risky in pursuit of a higher return.”

The Committee also announced that it is maintaining its policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities, and of rolling over maturing Treasury securities at auction, anticipates it will do so until normalization of the federal funds rate is underway.

Read the FOMC statement.
Read the ABA statement.

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