Federal Reserve raises interest rate

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Bill Chappell of NPR reports that America’s central bank is nudging its benchmark interest rate higher, announcing a move from the current 0.25-0.50 percent to a range of 0.50 and 0.75 percent. The decision emerged from a session of the Federal Open Market Committee Wednesday (NPR).

Analysts had widely expected the hike of a quarter of a percentage point. With a low unemployment rate and signs of growth among workers’ wages, Fed Chair Janet Yellen said the central bank expects to raise rates three more times in 2017. The official Fed announcement predicts “only gradual increases” in the rate (NPR).

The vote to nudge benchmark interest rates higher was unanimous, the central bank says. The federal funds rate has fallen sharply since reaching its recent high in June of 2006, when the rate stood at 5.25 percent (NPR).

The interest rate decision was announced at 2 p.m. ET; Yellen held a news conference 30 minutes later. We’ve updated this post with details from that event (NPR).

“The stock market was expecting the Fed to raise rates, so this increase in rates was already priced into market prices,” former Fed economist Ann Owen, a professor at Hamilton College, tells NPR’s Jeremy Hobson on Here and Now. “The only time there’s a reaction in the stock market is when there’s some element of surprise.”

Discussing banking officials’ economic projections Wednesday, Yellen said the GDP is expected to grow by a rate of 2.1 percent in 2017 (from a current mark of 1.9 percent) and by 2 percent in 2018 (NPR).

Yellen also noted that that over the past year, a net gain of 2.25 million new jobs have been added to the U.S. economy (NPR).

Announcing its decision, the Fed noted that inflation has increased “but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.”

The rate hike is the first of the year — despite signals from the Fed when it raised rates at the end of 2015 that more boosts were likely in 2016. While economists were encouraged to see U.S. workers’ wages finally rising this year, international developments (China’s slowdown, Brexit) complicated the picture (NPR).

In addition to the country’s economy, Yellen and her colleagues are also expected to take into account the ongoing political transition in Washington, where President-elect Donald Trump is preparing to take power and Republicans will continue to lead Congress (NPR).

 

Raising interest rates is also attractive to federal banking officials who want to accomplish a number of goals — from reloading its most powerful weapon to stimulate the economy to preventing potential bubbles from forming in either the investment or housing sectors (NPR).

As NPR’s Marilyn Geewax reported ahead of last year’s rate hike, “if rates already are as low as possible, then the Fed doesn’t have that weapon available to fight off a recession.”

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