The Federal Reserve, for the first time in nine years, voted to increase interest rates on Wednesday, marking a move away from the easy money, interventionist policy initiated during the financial crisis of 2008.
“The policy-setting Federal Open Market Committee [FOMC] voted unanimously to raise rates by 0.25% to a range of 0.25%-0.50%, not a whole lot but enough to test the still-weakened U.S. economy’s ability to absorb the higher borrowing costs that will follow the increase,” Fox Business reported.
Yellen: This action marks the end of an extraordinary 7-year period, during which the [rate] was held near zero. pic.twitter.com/bVZFYdgDdW
— FOX Business (@FoxBusiness) December 16, 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% objective,” the FOMC said in its statement released at the conclusion of Wednesday’s meeting.
The real world implications for the consumer include higher costs for borrowing money for big ticket items such as homes, cars, and appliances. The danger, if the Federal Reserve keeps interests rates artificially low for too long, is that inflation will be ignited, hurting consumers’ buying power and ultimately the health of the economy.
The historic norm for interest rates is 4 percent, the Washington Post reports.
Federal Reserve Chair Janet Yellen said on Wednesday that although inflation is currently low right now, the Federal Reserve believes that is due to “transitory factors,” referring to the current glut in the oil market among other things.
She also noted that it takes time for monetary policy actions by the Federal Reserve to work their way into the economy, so acting gradually now would avert the need for more drastic moves later, which could push the economy into recession.