Fed Hikes Rates for First Time in 7 Years

The Federal Reserve Building in Washington, D.C.
The Federal Reserve Building in Washington, D.C.

The Fed just lifted rates, ending seven years of an extraordinary measure to combat the damage from the 2008 financial crisis.

Fed officials voted unanimously to raise the key federal funds rate – the interest banks charge each other overnight – to a range of 0.25 percent to 0.5 percent, up from near-zero for the first time since December 2008.

Fed officials made the move in response to seemingly robust 5 percent unemployment. But in addition to maximizing employment, the Fed is responsible for maintaining stable prices. Inflation remains below the Fed’s 2 percent target. The statement by the central bank acknowledged the drag from declines in energy prices and decline in inflation expectations, even though it still expects to reach its target “over the medium term.”

The result is that any future rate hikes will be “gradual” and depend on further progress toward the inflation goal.

Fed officials feel a tad more optimistic about the U.S. economy in 2016, a vote of confidence that the rate hike won’t disrupt growth.

They increased their median projection for economic growth next year to 2.4 percent, up from 2.3 percent in their prior September projections. Fed officials also anticipate slightly less inflation and slightly lower unemployment in 2016 compared to their prior estimates. However, Fed forecasts about economic growth have been notoriously inaccurate during the more than six-year recovery from the Great Recession.