The US Federal Reserve raised its interest rates for the first time in nearly a decade. The Federal Open Market Committee made a long-awaited decision to tighten the monetary policy at the latest meeting on December 15-16.
The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25% to 0.5%, up from zero to 0.25%. The rate-setting committee believes the US economy is no longer in crisis. The central bank has two goals: low unemployment and stable inflation. The labor market has improved notably this year. The Fed foresees inflation inching up in the near years, but not hitting 2% until 2018.
The US Federal Reserve conducted a series of rate increases since June 2003 until June 2006. The last rate hike took place in 2006 when the funds rate was lifted to 5.25%. Then, the regulator adhered to the strategy of gradual softening of the monetary policy.
Since December 2008 until December 16, 2015, the benchmark interest rate was kept at the historical low at a range of 0 – 0.25%.
The FOMC decided to raise the discount rate to 1% from 0.75% and the repo rate to 0.50% from 0.25%.
The central bank improved its economic outlook. Compared to its last forecast in September, the Fed downgraded the unemployment outlook for 2016 to 4.7%, down from 4.8% and raised its GDP expectations next year to 2.4%, up from 2.3%. However, it lowered the core inflation forecast to 1.6% from 1.7%.
US officials foresee four more rate hikes in the coming year. Policy makers are considering an appropriate rate of 1.375% at the end of 2016.
US Federal Reserve Chair Janet Yellen repeatedly said during the press conference that future rate hikes will be "gradual", on the whole the monetary policy will remain accommodative. To sum up, the Fed decision is a sign of how much the economy has healed since the Great Recession.
