Happy Days Are Here Again (At Least in the U.S.)
The U.S. Federal Reserve officially end a policy meant to save the U.S. from the Great Recession.
After nearly a year of anticipation, the U.S. Federal Reserve raised interest rates to 0.25 percent Wednesday afternoon, the first increase since 2006. Rates have been near zero since 2008, meaning it was essentially free to borrow money from the federal government.
The increase was expected, and its practical impact is fairly limited. The move only increased the cost of borrowing from the U.S. central bank by a fraction, and the financial institutions that followed suit with their own increases also made just modest changes to their own rates. JPMorgan Chase and U.S. Bancorp, for instance, raised rates on consumer products like credit cards and car loans by 0.25 percent on Wednesday. Home mortgages are also likely to get slightly more expensive.
The move’s symbolic importance is far more significant because it ends an emergency policy put in place during the depths of the 2008 financial crisis to help Americans recover from the worst downturn since the Great Depression. And it stands as a clear sign of confidence in the health of the U.S. economy, as the Fed thinks it’s powerful enough to withstand an increase to the cost of borrowing without seeing growth slow. Since 2008, the central bank has made loans dirt cheap in an effort to encourage businesses and consumers to borrow and spend.
“With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate,” Fed Chair Janet Yellen said during a press conference Wednesday after the increase was announced. “The economic recovery has clearly come a long way.”
She added there would be “gradual” rate increases throughout 2016.
But while Yellen painted a rosy picture in the United States, her outlook on the rest of the world was far more pessimistic. This summer, as she delayed a rate increase, Yellen pointed to financial instability in Greece and the economic slowdown in China, and her worries have yet to abate.
“We have been concerned, as you know, about the risks from the global economy, and those risks persist. But the U.S. economy has shown considerable strength,” Yellen said Wednesday.
The move does carry risk. Any increase to the cost of loans for homes, autos, or other big-ticket items could prove a disincentive to borrow. Sen. Bernie Sanders of Vermont, who is running well behind Hillary Clinton for the 2016 Democratic presidential nomination, quickly condemned the policy shift.
“When millions of Americans are working longer hours for lower wages, the Federal Reserve’s decision to raise interest rates is bad news for working families,” Sanders said in a statement. “The Fed should act with the same sense of urgency to rebuild the disappearing middle class as it did to bail out Wall Street banks seven years ago.”
Sander’s pessimism wasn’t reflected on Wall Street. The Dow Jones Industrial Average spiked at 2:00 p.m. New York time, when the decision was announced, to close up 224.18 points, or 1.28 percent.
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