US Fed raises its key interest rate from record low near zero

webfact · December 16, 2015

Fed raises its key interest rate from record low near zero
By MARTIN CRUTSINGER

WASHINGTON (AP) — The Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans.

The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.

Wednesday's action signaled the central bank's belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand modestly higher borrowing rates.

"The Fed's decision today reflects our confidence in the U.S. economy," Chair Janet Yellen said at a news conference.

The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed's statement suggested that rates would remain historically low well into the future, saying it expects "only gradual increases."

"The Fed reaffirmed that the pace of rate hikes would be slow," James Marple, senior economist at TD Economics wrote in a research note. "The Fed's expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook."

Stocks closed up sharply higher. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 percent, for the day.

The bond market didn't react much. The yield on the 10-year Treasury note rose slightly to 2.29 percent.

Rates on mortgages and car loans aren't expected to rise much soon. The Fed's benchmark rate doesn't directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys.

But rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed's rate hikes remain modest.

Shortly after the Fed's announcement, major banks began announcing that they were raising their prime lending rate from 3.25 percent to 3.50 percent. The prime rate is a benchmark for some types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike.

Among other things, the Fed's low-interest rate policies have helped jump-start auto sales, which are on track to reach a record 17.5 million this year. And the Fed's first hike may not slow them.

Steven Szakaly, chief economist for the National Automobile Dealers Association, says dealers will press financing companies to keep loan rates low. And competition for buyers will spur them to take other steps to hold down rates, such as accepting lower profits.

"The rate squeeze will happen between the dealer and its finance company rather than the dealer and the consumers," Szakaly said. "Consumers won't even feel it."

For months, Yellen and other Fed officials have said they expected any rate hikes to be small and gradual. But nervous investors have been looking for further assurances.

Yellen indicated that Wednesday's rate hike was partially defensive. If rates stayed at near zero, the Fed might not have the tools to combat a recession.

"We've worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks," she said at her news conference.

When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy. But by staying close to zero, the Fed would be unable to cut rates or it would be forced to have negative rates for the first time in its history.

An updated economic forecast released with the policy statement showed that Fed officials predict that their target for the federal funds rate — the rate that banks charge on overnight loans — will end next year slightly above 1 percent. That is in line with the consensus view of economists.

The Fed's action was approved by a unanimous vote of 10-0, giving Yellen a victory in achieving consensus.

The statement struck a generally more upbeat tone in its assessment of the economy. It cited "considerable improvement" in the job market. And it expressed more confidence that inflation, which has been running well below the Fed's 2 percent target, would begin rising. It suggested this would happen as the effects of declines in energy and import prices fade and the job market strengthens further.

In addition to the funds rate, the Fed is raising three other rates: It lifted the interest it pays on the reserves that banks hold at the Fed to 0.5 percent from 0.25 percent. It raised the rate it pays on a type of short-term loan to 0.25 percent from 0.05 percent. The Fed plans to use those two rates to help meet its new higher target for the funds rate.

In addition, it announced a quarter-point increase in its discount borrowing rate to 1 percent from 0.75 percent. This is the rate banks pay when they borrow emergency loans from the central bank. This rate typically moves up in conjunction with the Fed's benchmark rate.
___

AP Business Writers Paul Wiseman and Josh Boak in Washington and Tom Krisher in Detroit contributed to this report.

-- (c) Associated Press 2015-12-17

webfact · December 16, 2015

US Federal Reserve raises interest rates for first time since 2006

WASHINGTON: -- It has been described as the most important Federal Reserve decision for a generation.

As expected, the US central bank has decided to raise interest rates for the first time since before the financial crisis began.

Its Federal Funds rate – which determines the level at which banks lend to each other overnight – rises a quarter of a percent to a range of between 0.25 and 0.50 percent.

The financial markets and most analysts had been expecting a modest hike, the first since June 2006. The Fed had said it would raise borrowing costs when it saw a sustained recovery in the economy. Chair Janet Yellen had strongly hinted at a rise by the year’s end – saying it would be more damaging to wait too long.

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Janet Yellen told a news conference shortly after the announcement. “The Committee is confident that the economy will continue to strengthen, the economic recovery has clearly come a long way although it is not yet complete.”

The move, which follows a two-day meeting of the Fed’s policymakers, is seen as a sign that the US economy is returning to normal after a long recession. During the crisis interest rates were kept at rock bottom levels to try to stimulate the economy that had taken a battering.

Unemployment has fallen to its lowest level for several years – it is around five percent according to the US Labor Department – while inflation remains stuck below the Fed’s two percent target.

The Chinese slowdown, a fall in the yuan and tumbling oil prices have perturbed markets but overall markets have been positive in the run-up to the announcement.

Some analysts say more important is what happens next in terms of the pace of subsequent rises. Fed officials have indicated they will remain cautious to nurture the fragile recovery.

This initial hike singles the Fed out from other central banks that are battling to stimulate their economies and generate growth.

Some analysts had argued that the economy was not ready for an interest rate rise just yet and that the Fed is jumping the gun. One risk is said to be that higher rates may also cause the dollar to rise.

-- (c) Copyright Euronews 2015-12-17

NongKhaiKid · December 16, 2015

Can't wait for the announcement from LoS that there will be no adverse effect here and tourism is expected to increase !

saakura · December 16, 2015

Though a very marginal increase, the market may take this as a sign of things to come. Fund managers might start thinking of shifting funds out of asian markets. This is not good news for Thailand.

saakura · December 16, 2015

Tourism might increase if there is a currency depreciation.

Berkshire · December 17, 2015

Not sure if you understand what's happening here. A stronger dollar would mean more purchasing power in Thailand for Americans, which may boost tourism.

Harsh Jones · December 17, 2015

Raising rates will devalue the dollar until interest rates are higher then the rate of inflation. They are clearly still way negative.

So this was just a symbolic move. The Fed has been trolling the world for 7 years by daring to raise rates. They moved off of zero but it essentially means nothing.

NongKhaiKid · December 17, 2015

I'm no businessman so will welcome informed comment.

What's the chances that with ' even richer ' tourists likely prices will be adjusted to take advantage which would balance out having more Baht for the Dollar ?

When things are bad Thais jack up prices and don't seem to respond to competition, they set their price and that's it.

slipperylobster · December 17, 2015

Higher prices for farangs..and lower for thais.....

Economics........thai style.

NeverSure · December 17, 2015

I don't see what difference it makes. Rates are still historically low. 4 - 6 percent "was" more the norm. I just don't see where this will change much atm.

Cheers.

Harsh Jones · December 17, 2015

Raising interest rates in the US does not make the dollar stronger.

Berkshire · December 17, 2015

You might want to check with economists and other experts on that. The feds didn't raise rates for the purpose of strengthening the dollar. But that is typically the result.

webfact · December 17, 2015

U.S. Federal Reserve raises key interest rate, ending years of near-zero rates
BY BNO NEWS

WASHINGTON: -- The U.S. Federal Reserve has raised the target range for its benchmark federal funds rate from the zero to 0.25 percent range to 0.25 to 0.5 percent, ending seven years of near-zero rates.

The Federal Open Market Committee said in a press statement that it has seen “considerable improvement” in labor market conditions this year, and said it is “reasonably confident” that inflation will rise over the medium term to its 2 percent objective.

“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 to 1/4 to 1/2 percent,” the statement said.

Full story: http://ethailand.com/breaking-news/u-s-federal-reserve-raises-key-interest-rate-ending-years-of-near-zero-rates/777/

-- eThailand 2015-12-17

Acharn · December 17, 2015

Really impossible to predict at this point. Paul Krugman points out that it will take time to see what effect it really has. The American economy has not been reacting to interest rates the way theory predicts for the last nine years. Supposedly low interest rates are supposed to cause inflation, but inflation measured by the PCE deflator has been well below 2% for the last three years. There was no Cost Of Living Adjustment to Social Security pensions this year because even headline inflation has been flat. Not sure what they'll decide to do if theory holds true this time and inflation goes even lower than it is now. If unemployment rises... Well, as PK says, it might take years to figure out what effect this has. I don't think this small an increase it going to affect the markets, because the rate we're talking about is the overnight rate that the Fed loans money to banks. There has not been any restraint on the interest rates the banks can charge, but they've been very reluctant to lend for the last eight years.

ThaiTony2 · December 17, 2015

Keep an eye on Gold prices dipping soon.

LuckyNo4 · December 17, 2015

Yes it does. Raising rates makes dollar assets more attractive to investors which in turn makes the dollar stronger thru demand.

Harsh Jones · February 13, 2016

Gold is up and the dollar is down on the DXY index since the rate hike.

Harsh Jones · February 13, 2016

Raising rates devalues previously purchased bonds because the new ones have a higher yield. This causes capital flight out of dollar assets. Hence why the dollar is down since the rate hike and other currencies like the Yen, Euro and gold are up.

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