Fed signals confidence in economy, raises interest rates for first time since 2006

Federal Reserve Bank Chair Janet Yellen | Courtesy of Day Donaldson/Flickr
Federal Reserve Bank Chair Janet Yellen | Courtesy of Day Donaldson/Flickr

For the first time since 2006, the Federal Reserve Bank is raising interest rates. In a move that was widely expected, the central bank announced a new federal funds rate target of 0.25 percent to 0.5 percent at the conclusion of its Federal Open Market Committee meeting on Wednesday afternoon.

Fed Chair Janet Yellen said the end of the seven-year period of zero interest is recognition of considerable economic progress that has been made since the Great Recession. The vote to hike rates “reflects the committee’s confidence that the economy will continue to strengthen,” Yellen said.

The Fed last raised rates in 2006. It cut them to zero in December 2008 in response to economic woes brought on by the financial crisis. The rate has stayed at that level until Wednesday’s unanimous vote by the Federal Open Market Committee.

Yellen said the Fed’s median projection for the federal funds rate rises to 1.5 percent by late 2016 and 3.25 percent by the end of 2018.

However, she said “the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” and she cautioned that people should not “overblow” Wednesday’s decision to raise interest rates by 25 basis points.

The Fed’s move follows a second consecutive jobs report that showed U.S. unemployment at 5.0 percent, its lowest level since April 2008.

Inflation, meanwhile, has persistently lagged the Fed’s target rate of 2 percent.

Yellen said the central bank expects median inflation to rise from 0.4 percent this year to 1.6 percent next year, 1.9 percent in 2017 and 2 percent in 2018.

The chair said the FOMC viewed the hike as prudent despite some concerns about global economic turmoil.

“Although developments abroad still pose risks to U.S. economic growth,” she said, “these risks appear to have lessened since last summer.”

Update: December 16 at 3:30 p.m.

This story was updated to include additional information shared during Fed Chair Janet Yellen’s press conference.

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