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0.25% increase, coming after decreases to aid recovery, is first boost since 2006
Fed Chair Janet Yellen says the rate increase announced Wednesday reflects confidence in the U.S. economy’s recovery.
Federal Reserve Board Chair Janet Yellen said the central bank’s move Wednesday to raise a key short-term interest rate shows the economic recovery “has come a long way” and the central bank is confident it will strengthen.
Yellen spoke to reporters after the Fed announced that it had edged up the benchmark federal funds rate by 0.25 percentage point. It was the first rate hike since 2006.
In a unanimous vote, the pol-
icymaking Federal Open Market Committee ended months of speculation about when the rate would be increased after it was lowered to an unprecedented rock-bottom level in December 2008 to try to fight the recession.
“This action marks the end of an extraordinary seven-year period during which the federal reserve funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Yellen said.
“It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans,” she said. “And it reflects the committee’s confidence that the economy will continue to strengthen.”
“The economic recovery has clearly come a long way, although it is not yet complete,” Yellen said.
Reflecting that, Yellen emphasized that Fed policymakers would move slowly with future rate hikes to avoid stifling economic growth.
“I think it’s important not to overblow the significance of this first move,” she said.
The rate remains very low by historical standards “and is likely to rise only gradually over time,” Yellen said.
The impact on consumers initially will be minimal, she said.
The Fed funds rate affects many consumer and business loans, but has less of an influence on longerterm borrowing, such as mortgages.
“Remember, we have very low rates and we have made a very small move,” Yellen said.
A majority of the 17 members of the committee expect the rate to rise to at least 1.375 percent at the end of 2016, according to projections released Wednesday. That would still be low by historical standards.
The biggest impact might be a symbolic one.
“The first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the U.S. economy, that we believe we have seen substantial improvement in labor market conditions,” she said.
“And while things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement,” Yellen said.
Policymakers had good economic reason for lifting the rate from its record low level.
The U.S. economy has come a long way since the recession; the jobless rate is down to 5percent, close to what many economists see as an optimal level before it starts to stir up inflation.
Yet the Fed decided in September — despite much anticipation — not to raise the rate because of the turmoil in global markets, triggered largely by uncertainties about China’s growth.
Three months later, there was a case to be made that Yellen should have waited just a bit longer.
The world economy remains sluggish, with emerging markets foundering. In addition, the recent dive in oil prices has pushed down inflation and intensified a sell-off in high-yield, junk bonds, threatening some market funds and raising concerns about a spillover to the broader financial system.
“As much as I want them (the Fed) to go — and I’ve felt they’ve been behind the curve — this is not the best time to go,” said Chris Rupkey, chief financial economist at Union Bank in New York.
Yellen acknowledged concerns about the global economy. But she said conditions in the U.S. warranted a rate hike.
“The underlying health of the U.S. economy I consider to be quite sound,” she said.
On top of that, Yellen said that waiting too long would mean the Fed would have to hike rates more quickly in the future and risk economic damage. This way it can go slowly and watch data closely to avoid slowing down growth.
“If the economy were to disappoint, the federal funds rate would likely rise more slowly,” she said.
“It’s been a long time since the Federal Reserve has raised interest rates, and I think it’s prudent to be able to watch what the impact is on financial conditions and spending in the economy,” she said.