“Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace,” the Fed said in its December 16 statement. “The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen… Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate.”
The new rate will be in the range of 0.25 percent to 0.5 percent, up from the range of zero to 0.25 percent where it sat since December 2008. The Fed originally dropped its target interest rate in order to bolster the failing economy of the Great Recession and it was considered necessary to leave it at that rock bottom level until now.
“I feel confident about the fundamentals driving the U.S. economy, the health of U.S. households, and domestic spending,” Fed chief Janet Yellen said during a press conference. “There are pressures on some sectors of the economy, particularly manufacturing, and the energy sector…but the underlying health of the U.S. economy I consider to be quite sound.”
In fact, the Fed raised its forecast for U.S. economic growth for 2016 based on current conditions. The Fed now believes that GDP will be as much as 2.4 percent next year, up from its September forecast of 2.3 percent.
Savers and investors are excited by the rate increase as it will eventually bring higher returns on their investments. It will however also mean a gradual rise in all other rates as well, meaning mortgages, car loans and credit card charges will become slightly more expensive.
This rate hike was the first of a long line of predicted increases over the next few years as the economy continues to strengthen and can sustain a less accommodating monetary policy.