The Fed Has Decided to Raise Rates!

Today the Federal Open Market Committee (FOMC) released a statement indicating that the Fed would raise the target federal funds minimum rate to .25 percent, the first rate increase we have seen in more than a decade. The Committee cited considerable improvement in the labor market conditions this year and confidence among its members that inflation will rise, over the mid-term, to the 2 percent target. The FOMC “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.” The Committee indicated that it expects the economic growth to be modest and warrant only gradual increases in the future stating “federal funds rate is likely to remain, for some time, below [normal levels].”

This is a vote of confidence. The Fed feels that the economy has made sufficient progress towards recovery since the Great Recession to warrant a rate increase. In fact, the economy has recouped all the losses of the great recession and then some. To extend the metaphor we used last Monday, the Great recession weakened the US economy to the point of peril, and low interest rates were the meds used to put us back on our feet. However, extended low rates at historically low levels are not normal, and have negative side effects too. It was time to wean off. The gradual increases the Fed described should get us back to normal while minimizing the withdrawal symptoms and finally complete this long recovery process.