The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be “gradual” and in line with previous projections.
The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent.
Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year.
“The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective,”
The Fed said it raised rates “given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes.”
The increase draws to a close an unprecedented period of record-low rates that were part of extraordinary and controversial Fed policies designed to stimulate the U.S. economy in the wake of the most devastating financial crisis since the Great Depression.
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the FOMC said. “The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
The Fed gave a largely positive assessment of the U.S.economy, saying that expansion continued at a “moderate pace”and that a “range” of job-market indicators “confirms that underutilization of labor resources has diminished appreciably since early this year.”
The central bank also said that the risks to the outlook for economic activity and the labor market are now “balanced,”changing from a previous reference to being “nearly balanced.”
The Fed said monetary policy is still “accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
The central bank acknowledged the state of low inflation, saying that it plans to “carefully monitor actual and expected progress toward” its 2 percent.
As part of the decision, the Fed increased the interest it pays on overnight reverse repos to 0.25 percent from 0.05 percent to put a floor at the lower end of the range. It also raised the interest it pays on excess reserves held at the Fed to 0.5 percent from 0.25 percent to mark the upper end of the range.
In a related move, the Fed’s Board of Governors unanimously voted to raise the discount rate, which covers direct loans to banks, by a quarter point to 1 percent.
Gross domestic product expansion hasn’t topped 3 percent since the third quarter of 2010, on a year-on-year basis. It’s projected to grow 2.2 percent in the three months through December.
Representing another symptom of weakness, inflation hasn’t reached the Fed’s 2 percent target since April 2012. The core version of the central bank’s preferred gauge of price pressures, which strips out volatile energy and food prices, was just 1.3 percent in the 12 months through October.
Yellen said Dec. 3 that continued labor-market improvement this year had bolstered her confidence that inflation would move back toward the Fed’s 2 percent goal.