FED Hikes Interest Rate Second Time in Decade

“Mother” Gives a Quarter…


The Federal Reserve just hiked the key interest rate today by a relatively modest quarter point, meaning that some loans will feature a slightly higher rate in the near future. Today’s rate hike was justified by the Federal Reserve officials by the prospects of a higher inflation and also by a “solid” US economy.

The FED officials are expecting three future rate hikes in 2017 and today’s move for increasing the Central Bank’s benchmark rate by a quarter point, from 0.5% to 0.75% came via a 10-0 decision, i.e. a unanimous vote. Today’s move from the FED is the second interest rate hike in the past ten years.

The last time the FED has raised the key interest rate was one year ago, in December of 2015, from the historic low of near 0 which was set in the aftermath of the 2008 global financial crisis.

FED officials also revealed their latest economic forecast for the US economy, which showed modest changes with regard to FED’s opinion about future economic growth, inflation and unemployment. The main thing taken into account by the FED’s updated economic forecast was the stronger growth of the US economy in the third quarter and a drop in November’s unemployment’s rate, which marks a nine year low, standing at 4.6%.

FED’s new predictions are somewhat optimistic, as they see unemployment figures dipping even further at 4.5% by the end of next year and staying at the same level in 2018. Also, FED predicts a stronger economic growth for this year, at 1.9% and 2.1% for 2017.

The long term estimate for the US economy was kept at 1.8%, which is less than half of Donald Trump’s 4% estimation, the figure floated during his campaign which was said to be achieved via his program of tax cuts, deregulation and increased infrastructure spending.

After growing at an anemic annual rate of 1.1% in the first 6 months of 2016, the US economy accelerated to 3.2% in the third quarter. Trump’s election victory created a wave of optimism in the markets, sending stock prices at record highs and driving up bond yields.

FED’s decision to hike rates from Wednesday will supposedly have only a marginal effect on auto/student loans and mortgages and in the long run on some other types of loans, the likes of credit cards, adjustable rate mortgages and home equity loans. All these rates are based on bank’s prime rates which are moving together with FED’s key interest rate.

The last time the FED hiked rates in December last year, the outcome was a massive selloff and huge volatility in the stocks markets.

Source: Bloomberg