Federal Reserve Raises Rates After 7 Years Near Zero

Federal Reserve

In a news release issued Wednesday, the Federal Reserve has raised its target funds rate by a quarter-point. The move, which gradually raises the rate from 0 percent to .5 percent, did not come as a surprise.  Although several members of the FOMC had expressed doubts about raising rates in past months, there were no dissensions to the hike.

This is the first increase to the rate since June 29, 2006, when the Fed moved the key rate to 5.25 percent. During the subsequent recession and financial crisis, which ended officially in the middle of 2009, the Federal Open Market Committee (FOMC) made several rate changes which resulted in a zero rate on Dec. 16, 2008 – exactly seven years ago.

In a statement by the FOMC given after the meeting, the committee said the increase would “support further improvements in labor market conditions and a return to 2 percent inflation.” In addition, the FOMC also raised the discount rate from a quarter-point to 1 percent. Also released were documents detailing the committee’s plan to raise rates, which is meant to be a gradual increase dependent upon economic figures. In a chart which showed the expectations of individual board members, most expected the new rate to settle at approximately .375 percent before the next rate raise would occur.

The rate raised today represents the amount charged between banks for overnight loan transactions. Banks and other lenders look to the federal funds rate to determine their own rates for credit cards, mortgages, corporate bonds, and small business loans.

By Jennifer Pfalz

Sources:
The Associated Press Twitter Page
CBS News: Fed hikes interest rates for first time in a decade
CNBC: FED RAISES RATES BY 25 BASIS POINTS, FIRST SINCE 2006

Image Courtesy of Stefan Fussan’s Flickr Page – Creative Commons License

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