A Dovish Interest Rate Hike?

December 16, 2015Monetary Policyby EW Content Team

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Yes, the Fed raised rates, but the language was dovish.

For the first time in 9 years, the Federal Reserve has raised interest rates in a move that could make many loans more expensive for companies and Americans.  Speaking today in Washington D.C., Federal Reserve Janet Yellen discussed the Federal Open Market Committee’s decision to raise its Federal funds rate target 25 basis points, making a new target range of 0.25 to 0.5%.

Yellen emphasized that the Federal Reserve will continue to monitor the economy closely in deciding how many more interest rates will come.  For now, however, the FOMC sees market improvement in the U.S. economy, encouraging the group to raise interest rates in a move that Yellen insists remains “accommodative” to economic growth.

"Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft,” the FOMC said in a statement, adding that it remains data dependent in its decision to raise rates. "A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year,” the FOMC said.

An Optimistic Outlook

In speaking on the decision, Janet Yellen said that it is a result of a robust and improving economy, which the Federal Reserve has emphasized, has seen improvement steadily throughout 2014 and 2015. "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 FOMC said.

A Balanced Approach

“While there are risks, the outlook to the labor market and the economy is balanced,” Yellen said, adding that monetary policy works with “lags.” This delayed response to monetary policy spurred Yellen to act now before inflation accelerates.

At the same time, Yellen repeatedly emphasized, “It’s important not to exaggerate the importance of this move,” noting that it is “only 25 basis points.” However, equity markets rose steadily on the news in a sign that there is confidence in the FOMC’s decision and its sign of enduring fundamental strength in the American economy.

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