The Federal Reserve announced Wednesday its first interest rate increase in more than nine years in a landmark move signaling the US has finally moved beyond the 2008 crisis.
The Fed raised the benchmark federal funds rate, locked near zero since the Great Recession, by a quarter point to 0.25-0.50 percent, saying the economy is growing at a moderate pace and should accelerate next year.
The move was widely expected but nevertheless marked the end of an era in which the Fed pumped trillions of cheap dollars into the US economy to fuel what turned out to be a very long recovery.
The move initiates what will be a series of slow rate increases which the Federal Open Market Committee, the Fed\’s policy board, promised would be "gradual" and follow the pace of the economy.
At the same time, the median projection by the FOMC foresees that rate at about 1.4 percent at the end of 2016, suggesting three or four more increases through next year.
The announcement pushed US stocks a bit higher — the S&P 500 was up 0.5 percent — and the dollar whiplashed, and was finally little-changed at $1.0969 per euro 30 minutes after the announcement.
The move to raise rates was also a momentous point in the near two-year tenure of Fed Chair Janet Yellen, who inherited the easy-money policies of predecessor Ben Bernanke with a mandate to get back to a normal monetary policy footing as soon as the economy was strong enough to do so.
In recent months some on the FOMC had shown reticence to support an increase, because, as even Yellen herself admitted earlier this month, there is still significant slack in the labor market and inflation remains very weak.
Given that situation, some prominent outside economists like Larry Summers and Paul Krugman had questioned why the Fed needs to move now.
But, in a small surprise, the FOMC support for the rate decision was unanimous, and the committee\’s statement pointed to "considerable" improvement in the past year in the labor market, and said it is "reasonably confident that inflation will rise, over the medium term, to its two percent objective."
The FOMC decided to raise the rate "given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes."
While it applies only to very short-term lending between banks, the fed funds rate sets the basis for longer-term rates throughout the global financial system.
Raising it means raising the cost of borrowing for everyone from foreign governments and companies to home and car buyers, while also better rewarding savers on their bank accounts.
Jim O\’Sullivan, chief US economist at High Frequency Economics, said he thinks rates will still rise faster than the Fed suggests.
"Normalization has finally begun but officials continue to signal that they expect the process to proceed gradually," he said in a client note.
"We remain skeptical that the pace will be as gradual as is being suggested, mainly because we expect the unemployment rate to keep falling, eventually leading to more upward pressure on inflation."