The federal funds rate will rise by a quarter of a point, and the domestic stock market will begin tanking immediately after, the Federal Reserve Bank of the United States announced Wednesday.
The federal funds rate is the overnight rate on loans between banks, and it is effectively the single most influential interest rate in the U.S. economy, as it has widespread affects domestic monetary and financial conditions. The fed rate bears on employment, economic growth, and inflation.
The central bank noted specific reasons as to why the economy is now ready to see marginally higher interest rates, including: a stronger labor market, increased economic activity and household spending, and solid job growth. In light of these factors and other market conditions, the Fed decided to “raise the target range for the federal funds rate to 1/2 to 3/4 percent.” The Board voted unanimously to “raise the interest rate paid on required and excess reserve balances to 0.75 percent,” a decision that takes effect Dec. 15, 2016.
This is only the second increase in the fed funds rate since June, 2006. The Fed reduced interest rates to near zero during the 2007 financial crisis, where they have remained.
In its determinations of any future rate increases, the Fed said that it would assess economic conditions at that time, and future periods, relative to its goal of full employment and 2 percent inflation.
The rate increase, which was considered a certainty by many in the finance world, comes after a historic month for domestic stocks following Election Day. (RELATED: Here Is How The Stock Market Looks One Month After Trump)
President-elect Trump plans to institute across-the-board tax cuts, massive deregulation of the energy and banking sectors, and increases in spending on infrastructure and public works. As a result of his pro-business tax proposals and his plan to rebuild America, the Fed altered their outlook to one of more growth, lower unemployment, and lower inflation.
The stock market did not respond favorably to the Fed interest rate announcement. The Dow Jones Industrial Average lost 60 points after Yellen announced the rate increase.
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