Federal Reserve Raises Short-Term Interest Rates

It's not that big of a deal. And it wasn't unexpected. The Fed's been telegraphing this move for some time.

At WSJ, "Quarter-Point Increase Marks First Rise in Almost a Decade."

And, "Fed Raises Rates After Seven Years at Zero, Expects ‘Gradual’ Tightening Path":

The Federal Reserve said it would raise its benchmark interest rate from near zero for the first time since December 2008, and emphasized it will likely lift it gradually thereafter in a test of the economy’s capacity to stand on its own with less support from super-easy monetary policy.

Fed officials said they would move up the federal funds rate by a quarter percentage point on Thursday, to between 0.25% and 0.5%, and would adjust their strategy as they see how the economy performs. At these low rates, they added, policy remains accommodative.

“The [Fed] expects economic conditions will evolve in a manner that will warrant only gradual increases in the fed funds rate,” the Fed said in a statement following its two-day meeting. To hammer home this point, officials added in a second place in their statement that they anticipated “gradual adjustments” in rates.

Fed Chairwoman Janet Yellen won a unanimous vote.

New projections show officials expect their benchmark rate to creep up to 1.375% by the end of 2016, according to the median projection of 17 officials, to 2.375% by the end of 2017 and 3.25% in three years. That implies four quarter-percentage-point interest rate increases next year, four the next and three or four the following.

That is a slower pace than projected by officials in September and much slower compared to earlier series of Fed rate increases. In the 2004-06 period, for example, the Fed raised rates 17 times in succession, an approach Fed officials don’t intend to repeat. In September seven Fed officials believed the fed funds rate could rise to 3% or higher by 2017; now just four do.

When the Fed moves next will depend importantly on how inflation evolves. The Fed’s preferred measure of inflation has run below its 2% objective for more than three years. The central bank focused extra attention on the inflation outlook in its statement, saying it would “carefully monitor” actual and expected progress toward the goal. This point implied the Fed will be reluctant to raise rates again unless it sees inflation actually moving up. For now, officials said they were “reasonably confident” inflation would rise.

Ms. Yellen, in a speech and in testimony earlier this month, said a rate increase represented a vote of confidence in the U.S. economy after the deep 2007-09 recession and a long, often-disappointing recovery. Still, uncertainties abound about how markets and the economy will respond in the months ahead.

Any number of factors might throw the central bank off its plans...

Keep reading.