Federal Reserve Raising Interest Rates
WASHINGTON (AP) — The Federal Reserve is raising interest rates after seven years of record lows. But it's signaling that further rate hikes will likely be made slowly as the economy strengthens further and muted inflation rises.
The Fed's move to lift its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent ends an extraordinary seven-year period of near-zero rates that began at the depths of the 2008 financial crisis. Consumers and businesses could now face modestly higher rates on some loans.
The Fed's action reflects its belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand higher borrowing rates. But the statement announcing the rate hike said the committee expects "only gradual increases" in rates going forward.
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 many types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike.
Fed Chair Janet Yellen says today's interest rate hike was partially defensive. If rates stayed at near zero, the Fed might not have the tools to combat a recession.
At a news conference this afternoon, Yellen says Fed policymakers have worried that with interest rates at zero, they have "less scope to respond to negative shocks."
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.
Yellen also stressed that the hike was pre-emptive, saying: "It takes time for monetary policy actions to effect future economic outcomes."
Inflation still remains well below the central bank's 2 percent target, largely because of transitory factors such as falling oil prices. Yet the Fed made the move despite low inflation because its policies operate on a lag. This means that Yellen wanted to head off the risk of sharply higher inflation a year from now, rather than today.