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December 2015 FOMC Meeting: Fed Raises Fed Funds Rate

It marks the end of an era as the Fed raised its Fed funds target range to 0.25%-0.50%, an increase that hasn’t happened in over nine years since June of 2006. This increase ends an unprecedented period of record-low rates which were a part of the Fed’s controversial policies designed to stimulate the US economy after the worst financial crisis since the Great Depression in 2008. The FOMC lowered its benchmark rate to near zero in December 2008, three months after the collapse of the investment bank Lehman Brothers Holdings, Inc. and 10 months before unemployment peaked at 10%.

The vote was unanimous to hike the Fed funds rate up a ¼ point from its recovery range of 0-0.25% to its new range of 0.25%-0.50%. Jason Grote, President of Central Coast Lending, “was not at all surprised by the rate hike. There had been so much talk and warnings letting everyone know before the meeting that a rate hike may occur that it was expected. Furthermore 90% of economists expected it.”

The Fed predicts “gradual” and “data dependent” rate increases ahead. The majority of members project the rate to be 1.5% or lower by the end of 2016 and include a predicted total of 3 rate hikes within the year. It is predicted to be at 2.4% in 2017. In the statement released following the meeting of the Federal Open Market Committee, they expect “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.” Fed policymakers stressed they intend to move gradually and in small increments, and will pull back if the economy falters. The team of policy makers judged the US economy to be expanding at a “moderate pace” and the labor market, they said, has shown “considerable improvement.” Inflation remains below the committee’s 2% target, but the committee remains confident it will get there in the “medium term.” The falling energy prices and commodity costs are believed to be the contributors to low inflation, but the Fed believes they will soon subside and prices will begin climbing again.

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