Federal Reserve Chair Janet Yellen announced Wednesday afternoon that the fed would raise the federal funds rate, marking the second rate increase in just three months and only the third since 2007.
The federal funds rate is the overnight rate on loans between banks, and it’s the single most influential interest rate in the U.S. economy, as it has widespread effects on domestic monetary and financial conditions. The fed rate bears on employment, economic growth, and inflation.
The Federal Open Market Committee (FOMC), the branch of the Federal Reserve Board that decides monetary policy, met Tuesday and Wednesday to discuss the possibility of raising the federal funds rate. The committee noted specific reasons as to why the economy is now ready to see marginally higher interest rates, including: a stronger economy and a strengthening labor market.
“The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term,” the FOMC wrote in a statement. ” In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent.”
Economists were anticipating a rate hike for weeks, encouraged by robust job growth in February, mounting wage pressure and since inflation is nearing the Fed’s goal of 2 percent. Leading into Wednesday’s decision, investors were predicting the odds of a rate increase at 95 percent. (RELATED: Markets Anxiously Await The Most Crucial Week)
Yellen announced last December that the Fed decided to “raise the target range for the federal funds rate to 1/2 to 3/4 percent,” in light of what it viewed as a strengthening economy. The Board voted unanimously to “raise the interest rate paid on required and excess reserve balances to 0.75 percent,” a decision that took effect Dec. 15, 2016.
In the months after the December hike, the market is in great shape. The Dow posted its second thousand point jump, posting above 21,000 for the first time in the benchmark index’s history. The aggregate value of 30 major companies on the Dow has jumped $273 billion since President Donald Trump defeated former Secretary of State Hillary Clinton. The S&P 500 also set an all-time intra-day trading record in early March, tracking above 2,400 for the first time.
The focus for investors is trying to discern whether or not Wednesday’s decision is illustrative of future rate hikes. After December’s meeting, Fed officials hinted at its December meeting that three rate increases were coming in the near future.
For her part, Yellen hasn’t made any attempts to conceal her personal fiscal policy prescriptions, insisting that the Fed has not been relaxed in its approach to raising the federal funds rate. Despite months of job gains, the unemployment rate remains relatively unchanged, which could signal that workers are waiting to enter the labor force. There are currently some 95 million Americans who are not counted in the labor force.
When looking at the more broad spectrum unemployment rate called the “U-6,” rate, unemployment is actually somewhere around 9.3 percent. Yellen plans to alter the speed and scope of future rate increases depending on how “hot,” the economy runs in response to the Wednesday’s decision.
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