Banking & Finance and Government

Federal Reserve ends an era of near-zero rates

December 18, 2015
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The Federal Reserve Board’s Federal Open Market Committee officially raised the target range for the federal funds rate from 0.25 percent to 0.50 percent last week, ending a nearly seven-year period of federal funds rates held near zero during the recession.

Janet Yellen, chair of the Board of Governors of the Federal Reserve System, said during a Dec. 16 press conference the decision recognizes considerable progress and reflects the committee’s confidence the economy will continue to strengthen.

“We decided to move at this time because we feel the conditions we set out for a move — namely, further improvement in the labor market and reasonable confidence inflation would move back to 2 percent over the median term — we felt those conditions had been satisfied,” said Yellen.

“We have been concerned about the risk from the global economy, and those risks persist, but the U.S. economy has shown considerable strengths.”

The committee anticipates with gradual adjustments and careful monitoring, economic activity “will continue to expand at a moderate pace and labor market indicators will continue to strengthen” and inflation will “rise to 2 percent over the medium term as transitory effects of declines in energy and import prices dissipate,” according to the FOMC statement.

Yellen indicated the committee recognizes monetary policy “operates with lags,” and a delay in the start of policy normalization could result in “overshooting both our unemployment and inflation objections.”

“I think it is important not to over-blow this first move. We have indicated we will be watching what happens in the economy in terms of our actual and forecast, our project conditions relative to our inflation goals, and adjust,” said Yellen. “Our expectations, as I have indicated, are that policy adjustment will be gradual over time, but of course they will be informed by the outlook we (see from) incoming data.”

As “transitory factors” abate, which are currently holding inflation well below the Fed’s 2 percent goal, the committee’s median inflation projection rises from 0.4 percent this year to nearly 1.6 percent next year, before reaching 1.9 percent in 2017 and 2 percent in 2018.

“That is a forecast, and we really need to monitor, over time, actual inflation performance to make sure it is conforming, evolving in a manner we expect,” said Yellen.

Dennis Echelbarger, founder and board chair of the local CPA firm Echelbarger, Himebaugh, Tamm & Co., said he felt the market was prepared for the move by the Federal Reserve, and it will have very little effect on the West Michigan regional economy.

“A quarter of a point is going to make almost no difference to most people,” said Echelbarger. “It may have a slight effect on variable interest rates charged by financial institutions, and one example would be credit cards. So, if anything, I would say people need to look at, despite the time of year, how they get their debt paid down.”

Echelbarger said the one exception with the move by the Federal Reserve could be in the real estate market, but the impact may be influenced more by public sentiment rather than actual mortgage rate changes.

“Sentiment by the public is not predictable, and it may put some people in a panic mode to buy before it goes sky high. I don’t think this increase — even to the degree the Fed has been talking about over the next 12 months — will have a major effect.”

While consumers with variable interest rates on mortgages or credit cards could be charged more, Echelbarger didn’t anticipate a significant impact to business owners in the region.

“Businesses in general are cash rich right now,” said Echelbarger. “They don’t need to borrow. Banks have plenty of capital, and they can’t afford to raise their rates a whole lot because what lending they have won’t happen.”

Echelbarger said while the global economy is struggling more than the U.S. economy, part of the problem is due to how sluggish the national economy has become.

“The Fed was aiming for 2 percent inflation over the last eight years and it hasn’t quite gotten to that, and when you have that kind of issue, wages don’t grow a lot. Therefore, the economy grows slower,” said Echelbarger.

“The international markets depend on the U.S.; that is where they invest their excess funds. I’m not sure it is going to have a major impact on the international market one way or the other. The international market needs to resolve some of its own issues, and this is one of our own issues we are trying to resolve,” he said.

On the day of the announcement, the Dow Jones Industrial Average opened at 17,530.85 and rose by about 218 points to close at 17,749.09. It opened at 17,756.54 on Dec. 17.

The NASDAQ Composite opened at 5,033.48 on Dec. 16 and increased by more than 37.6 points to close at 5,071.13, while opening Dec. 17 at 5,087.17.

In the European market, the FTSE 100 opened Dec. 16 at 6,017.80 and closed at 6,061.20, while the Nikkei 225, the price-weighted average of 225 top-rated Japanese companies, opened at 18.868.20 and closed at 19,049.91.

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