Fed Raises Interest Rate For 2nd Time Since 2006

This past Wednesday, December 14, the Federal Reserve raised the target interest rate from between 0.25 and 0.5 to between 0.5 and .75. This marks only the second time the Fed has raised the target interest rate since 2006, with the only other raise being in December of 2015. The Fed also announced that it intends to take a more aggressive approach and raise the target interest by a further 0.75 points in 2017.

In its press release, the Federal Reserve cited decreased unemployment rates and increased inflation as the two primary reasons for the increase in the target rate. However, the Fed did note that inflation is below its target of 2%, and as a result indicated it will “carefully monitor actual and expected progress toward its inflation goal”.  In response, the Dow Jones Industrial Average dove 217 points to 19,749, but then rose almost immediately back up to 19,875.

Economic projections also released by the central bank indicate that the Federal Reserve now expects to increase rates three times in 2017, to a rate of 1.4 percent by year’s end.  This reflected a departure from its September projection, which indicated that the Fed expected to raise the rate twice in 2017.

Some analysts have indicated that if President-Elect Trump is successful in slashing tax rates and increasing spending, the Fed may be forced to raise rates in 2017 even faster than it is currently anticipating.  Cutting taxes and increasing spending could result in increased inflation rates, which the Fed has indicated is a major factor that has been a hindrance to prior increases in the target interest rate.

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