Why the Fed raised rates (for a fifth time)

  • By Karl Russell,
  • The New York Times News Service
  • Banking
  • Economic Insight
  • Investing in Bonds
  • Market Analysis
  • Markets
  • Bonds
  • Banking
  • Economic Insight
  • Investing in Bonds
  • Market Analysis
  • Markets
  • Bonds
  • Banking
  • Economic Insight
  • Investing in Bonds
  • Market Analysis
  • Markets
  • Bonds
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

As expected, the Federal Reserve on Wednesday raised its benchmark interest rate to a range between 1.25 percent and 1.5 percent. It is the fifth rate increase as the Fed continues to retreat from its economic stimulus campaign. It is almost certainly the last change in monetary policy on Janet Yellen's watch as chair.

Since the Fed started to raise rates, the economy has kept improving

The Fed lowered its benchmark rate — the rate that banks charge one another to borrow money overnight — to near zero after the financial crisis began in 2008. The goal was to encourage lending and spur the economy. Judging that the economy no longer needed as much help, the Fed began to raise rates at the end of 2015.

Job growth — a key consideration for the Fed — is robust

The economy has added 196,000 jobs a month on average since the Fed started to raise rates in 2015. The unemployment rate is now at 4.1 percent, its lowest level since 2001, and the Fed's own labor-market index has been on a steady upswing since the financial crisis ended.

The economy keeps growing, but concerns about low inflation persist

The economy has expanded at a fairly steady pace since the financial crisis ended, and the Fed expects that growth to continue. But this is the sixth straight year that inflation has remained below the 2 percent annual pace the Fed regards as healthy. Policymakers have continued to raise rates because most Fed officials are confident that inflation will strengthen as the economy continues to grow.

Borrowing costs are rising, but savers should benefit

When the Fed raises interest rates, it is trying to increase borrowing costs for businesses and consumers. So far, the impact has been very modest. Interest rates on car loans have risen slightly; interest rates on mortgage loans are at roughly the same level as when the Fed started to raise rates. Credit card rates, however, have increased steadily since 2009 and could continue to as the Fed raises rates. And although savers have so far seen little change in the rates they are paid, there is hope that that would change.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


© Copyright 2018. All rights reserved by The New York Times Syndication Sales Corp. This material may not be copied, published, broadcast or redistributed in any manner.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.