Federal Reserve Raises Interest Rates for First Time Since 2006

Guest Post by Expert Greg Kyle

On Thursday, the Federal Reserve announced that it would raise interest rates by 0.25%, the first interest rate rise in nearly a decade. This widely-expected rate rise comes as the Fed believes economic growth in the U.S. is continuing at a moderate pace with solid gains in “household spending and business fixed investment.”

What does this rate rise mean for the economy and investors? The increase by itself is minimal and doesn’t appreciably change the Fed’s previous position. Since 2008, the Fed’s target range was “zero to ¼ percent.” On Thursday, the Federal Open Market Committee decided to “raise the target range for the federal funds rate to ¼ to ½ percent.” This minimal increase in the target Federal Funds rate could have a small impact on short-term interest rates offered by some banks, but it is unlikely to have an impact on long-term rates such as mortgages and corporate loans. In fact, according toBankrate.com, while the benchmark 30-year mortgage rate did inch up to 4.09% after the Fed announcement from 4.06% the previous week, the 4.09% is the same level/rate as a month ago.

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Corporate bond yields were also relatively unchanged with the yield on the Moody’s 10-year Aaa index at 4.01%.

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More importantly, the Federal Reserve has signaled to the markets that it is “accommodative” to further rate hikes in the coming year as labor market conditions continue to improve and inflation ticks up to the 2 percent level.