Free Minds & Free Markets

Federal Reserve Raises Interest Rate Target for Third Time Since 2006

The Federal Reserve announced today it will be raising its federal funds interest rate target (the rate banks charge each other for overnight loans) by a quarter of a percentage point, to a range of 0.75 to 1 percent. The two previous hikes since 2006 were in December 2015 and December 2016. Two more rate hikes are expected before the end of 2017, and by 2019 the Fed expects to be looking at 3 percent interest rates again.


In the normal course of events, this will likely lead to consumer interest rates to also rise down the line. USA Today warns "Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike."

As per Chicago Tribune, the Fed credits "a strengthening job market and rising prices [that] had moved it closer to its targets for employment and inflation."

As CNBC reports, the Fed thinks things are going pretty OK for the U.S. economy, though:

According to reports released just before the Fed decision, home builder confidence is at a 10-year high, and manufacturing in New York is surging due to a multi-year high in orders and a decade-high in unfilled orders.

However, the confidence has been slow to transfer to actual growth.

The Atlanta Fed on Wednesday cut its view for first-quarter GDP to a 0.9 gain – coincidentally, the same level of fourth-quarter growth when the FOMC approved the December 2015 rate hike.

Yellen said Wednesday that GDP is a "noisy" indicator from quarter to quarter and believes the economy over the long run is running at about a 2 percent pace.

Some reporting here from the December 2015 rate hike quoted some experts expecting the hike to disrupt the heated stock markets rise. That has, so far, not happened at all.

Scott Sumner, king of the "market monetarists," thinks that the Fed has moved itself into a position where actions like this likely won't have quick and obvious effects on visible financial markets:

A few years ago, markets reacted very strongly to rumors of a possible Fed rate increase. That's because NGDP [nominal gross domestic product] was at a suboptimal level, and the Fed policy stance had been too contractionary for a number of years. A rate increase would make the economy noticeably worse off than if the Fed refrained from increasing its fed funds target. (Recall that the Fed uses the fed funds rate as a signal of easing and tightening of policy.)

In recent months the level of NGDP is close to the level that results in macroeconomic equilibrium (employment close to the natural rate and inflation expectations close to 2%. Thus the market is relatively indifferent as to whether the Fed raises rates or not. As a result, Fed related news doesn't have much impact on asset prices. But this doesn't mean the Fed no longer matters, just that they are no longer the destabilizing force that they were during the 2008-15 period.

My 2009 Reason feature on the then-rising anti-Fed movement.

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  • Tak Kak||

    I think it's a good move for the long-run, can't say it doesn't look politically motivated for the short-run though.

  • Jerryskids||

    Surely you're not suggesting the Fed is deliberately trying to throttle a sputtering economy just to make Trump look bad, are you? You see how well they've done in ensuring Obama had a glorious eight-year "recovery" as his legacy. An economic legacy almost as good as FDR's. "We far under-estimated the amount and severity of the beatings it's going to take to restore morale."

  • Tony||

    If they're raising the interest rate that means the economy is doing well. Jesus Christ you people. All this bitching and moaning for the sake of a treasonous orange pimple who's gonna get impeached sooner rather than later.

  • american socialist||

    You seem miserable. Are you ok?

    Can you pay my bills?

  • Tony||

    The clock change is always a bitch for me. And stop begging, it's unseemly. Just vote Democrat and you'll get a nice, respectable safety net to draw on.

  • american socialist||

    Voting democrat doesnt really help me now in the future. I don't qualify

    Why wont you help me out with your generous ways?

  • Gracchus||

    That's rich coming from a guy called "american socialist".

  • Tony||

    But it's good to hear it here first who the fucktards on the right are going to blame when the next recession hits. I suppose I could have guessed.

  • BTS11||

    So the next market crash will happen in the next 3 years is what I'm guessing

  • Diane Reynolds (Paul.)||

    Does anyone know, or has any media outlet discovered if the Fed is actually meeting its target rate, since, interest rates can't be raised like the used to be raised... by... you know, raising them?

  • Tony||

    Do you mean is inflation meeting the 2% target? Yes, that's why the Fed is raising the interest rate.

  • Diane Reynolds (Paul.)||

    No. It's my understanding that the Fed sets the rates by fiat. When the large banks borrow from the fed, that interest rate is 'felt' by the large financial institutions and therefore controls the 'money supply' (cost of money).

    However, with the new post-stimulus normal, banks are overflowing with cash and aren't actually borrowing money from the fed. So the Fed now uses some kind of securities manipulation (highly theoretical) to effectively set rates at a calculated target. Does anyone know (or care) if this new way of raising interest rates is actually working? Or have we finally gotten to a point where someone comes in to the room and says, "Rates are now X" and everyone scrambles based on the shared knowledge that "Rates are now X"?

  • Tony||

    Is it a new thing that the fed sets a target rate and then uses various means (including "open market operations"--buying or selling securities) to incentivize banks to meet it?

  • Diane Reynolds (Paul.)||

    I believe that their inability to simply charge an interest rate based on money borrowed from the Treasury is new. Because until post 2008, banks never had the reserves on hand they have now, essentially allowing them to operate in perpetuity without picking up the phone and calling Gladys at the Fed front desk.

  • Tony||

    Post-2008 the fed does have new tools to incentivize. I can't say if they're like on shaky functional ground.

  • Diane Reynolds (Paul.)||

    I believe this gets into it here:

    Manipulating Interest Rates
    The first tool used by the Fed, as well as central banks around the world, is the manipulation of short-term interest rates. Put simply, this practice involves raising/lowering interest rates to slow/spur economic activity and control inflation.

    The mechanics are relatively simple. By lowering interest rates, it becomes cheaper to borrow money and less lucrative to save, encouraging individuals and corporations to spend.

    This tool, as I stated above is no longer available, leaving:

    . The real difference, however, is that OMO is more of a fine-tuning tool because the size of the U.S. Treasury bond market is utterly vast and OMO can apply to bonds of all maturities to affect money supply.

    Influencing Market Perceptions
    The final tool used by the Fed to affect markets an influence on market perceptions. This tool is a bit more complicated because it rests on the concept of influencing investors' perceptions, which is not an easy task given the transparency of our economy. Practically speaking, this encompasses any sort of public announcement from the Fed regarding the economy.
  • earthandweather||

    Oh joy. After years and years, we have finally reached the interest Alan Greenspan lowered to after planes slammed into the World Trade Center. Thank goodness our economy is doing so well. Is anybody buying this crap? Reason needs to talk about economics more often and more deeply. It is going to be the death of us.

  • Tony||

    Reason can't get too deep because it would have to acknowledge that the only way to un-stagnate the economy is to transfer a lot of wealth downward, and it doesn't allow that tool in its philosophical toolkit.

  • american socialist||

    The rich pay by far the most in taxes. And how do you propose transferring this wealth tAx downward? Wealth tax. The rich dont have as much to fund all these programs you want

    Besides the tax would go to welfare of well off liberals like at the NEA, green billionaires and lawyers

  • american socialist||

    The 1 percent had 20 percent of the income but pay an average effective rate close to 30. Guess where all the liberal goodies would have to come from? Bottom 99

  • american socialist||

    Also i thought obama got the economy in great shape but yet here you are saying it is stagnating. Which is it?

  • The Last American Hero||

    Worked in the Soviet Union, Cuba, China and Venezuela, why not try it here?

    Do you even read what you write? The only way to get an economy going is government wealth transfers? The only way?

    Lower corporate tax rates to spur investment? Reduce regulations to make it easier to start a business and hire people? Reduce/eliminate min wage to encourage hiring of entry level workers? Change banking regs to eliminate too big to fail? Reduce government spending that crowds out investment and raises debt? End foreign military engagements that diverts resources towards blowing things up, gets young Americans killed, and drives up debt?

    Nope, only massive transfer payments.

  • Gracchus||

    Lower corporate tax rates to spur investment?
    In the long term, maybe. But that boosts the deficit, which will require spending cuts, which will offset the growth effect in the short-term.

    Reduce regulations to make it easier to start a business and hire people?
    I thought most of the startup regs were run on the state and local level.

    Reduce/eliminate min wage to encourage hiring of entry level workers?
    Nothing gets workers more motivated and confident to work than a pay cut.

    Change banking regs to eliminate too big to fail?
    The banks would rather fail (and drag us with them) then let the feds touch 'em.

    Reduce government spending that crowds out investment and raises debt?
    Given 2% growth and the Depression in Europe, I'd say government spending and crowding-out is the least of our concerns.

    End foreign military engagements that diverts resources towards blowing things up, gets young Americans killed, and drives up debt?
    Last I checked, the war industry was one of the last major job-creators in the whole industrial-sector of the economy. Or at least the most secure. Plus killing foreigners is the one investment that never fails to bring back a return.

  • american socialist||

    1. The corporate tax rates incentivize keeping profits earned overseas there. Needs to be more freedom in where to put the money. Corporate taxes here are essentially paid by employees in less compensation. I don't think less govt spending would mean less growth...this seems to be the broken window fallacy. As i suspect govt spending is more inefficient then leaving it with folks who have a stake in the game.

    2. Then scale back regs on the local and state level.

    3. Eliminating the min wage does not mean they will get a pay cut necessarily. And if they did why would they continue to work there if not worth it?

    4. This seems like a dubious claim of the banks.

    5. What is the concerns then?

    6. I have to agree with vastly scaling back war. It is the broken window fallacy all over again.

  • chemjeff||

    You want to transfer a lot of wealth downward?

    Okay, you start.

  • WhatAboutBob||

    Trump is going to completely remake the Fed within a year. Not only is he going to take the Supreme Court away from the liberals for a long time, he's going to do the same for the Fed.

  • Gracchus||

    Since when did the liberals own the Fed, let alone the Supreme Court?

  • renicantik||

    When I involve God in every dream, I'm sure there is nothing impossible.
    obat kulit melepuh dan berair pada bayi

  • Frank Wooton||

    The iPhone 7S will act as the perfect bridge between the last generation iPhones that we saw till 2016 and the next level iPhone 8 that we are all looking forward to. But will we see the iPhone 7S and the iPhone 8 being released together, or a year apart as has been the norm up until now? Can't wait for iPhone 7S Release Date.


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