Fed hikes interest rates for the first time since 2006

UPDATED: The Federal Reserve on Wednesday announced it will raise its benchmark interest rate for the first time since before the financial crisis.

Janet Yellen

Federal Reserve Chairwoman Janet Yellen. (AP Photo/J. Scott Applewhite)

The last time the Fed raised rates was 2006, amid a boom that was fueled by easy credit and a home-buying and real estate binge that proved unsustainable. It was before Apple released its first iPhone, and Casino Royale and The Departed were among the major box office releases.

The move to raise the rate for short-term lending between banks by a quarter-point was widely expected and is a signal in the confidence in prolonged recovery.

As The Atlanta Journal-Constitution’s Russell Grantham reported earlier this week:

The expected move will come after years of anticipation and trepidation. Several times now, speculation of a hike set the stock market swooning and some experts howling about the effect on a still-wobbly economic recovery. When it finally happens, as is expected at the Fed meeting Tuesday and Wednesday, the move could seem almost anticlimactic.

For one thing, the rate the Fed sets — for short-term lending between banks — doesn’t automatically change consumer or savings rates. But it sets a direction other rates generally follow.

For another, “Nobody believes the Fed will move up rates very quickly,” said University of Georgia economist Jeff Humphreys. The Fed rate has been near zero for years as part of a policy to goose the recovery, and this month’s initial increase is expected to lift it just a quarter-point. Another quarter-point bump might come next year, Fed-watchers say.

The Fed has kept its short-term rates at near zero since the end of 2008. The moves during the crisis to slash the key rate were part of the Fed’s extraordinary steps to help stimulate an economy then in free fall.

In a statement Tuesday, the the Federal Open Market Committee said it “currently 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. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced.”

The vote for the rate increase was unanimous. Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart is among the members of the FOMC.

Grantham has a good run down of what the Fed’s actions will mean for you.

A survey of Atlanta Society of Finance and Investment Professionals found its members expect the Fed to raise its rates over time by 50 basis points through the end of 2016.

At a media briefing Tuesday with ASFIP, Ernest Dawal, chief investment officer of wealth and investment management at SunTrust Banks, said he expects the nation’s economic output to grow by a modest 2 percent in 2016 and that the Fed will be deliberate in raising rates.

The stock market has been buffeted in years past by rumors of Fed action, but equities by-and-large are likely priced now to reflect the impact of any rate increases.

Mortgage rates remain near historic lows, and the Fed’s rate increase will likely lead to a modest increase in mortgage rates. But rates are still very affordable by historical standards.

“There is no need for a future home-buyers to panic or feel that they can’t afford to purchase a home,” Erin Lantz, vice president for mortgage at Zillow Group, said in a statement. “It’s important to remember that while today’s decision will lead to higher rates than we have been accustomed, they are still historically low. Mortgage rates are an important factor to consider during the home buying process, but ultimately shouldn’t be the deciding factor on whether or not to buy. Personal considerations about the home type and location should trump concerns about moderate rate changes.”

The stock market seemed to take the rate increase in stride. The Dow Jones Industrial Average was up more than 200 points before 4 p.m., and the S&P 500 about 30 points.

“We do feel the Fed will move slowly like they say they will,” said Gregory Silberman, chief investment officer at Atlanta Capital Group. He predicts a potential Fed interest rate increase of up to 75 basis points over time through the end of 2016, though he said he expects the central bank to leave itself with ability to “pause” its actions next year if it detects volatility in the economy.

 

 

 

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