Fed hikes rates for second time in a decade

Fed hikes rates for second time in a decade

Fed hikes rates for second time in a decade
© Greg Nash

The Federal Reserve hiked interest rates for the second time in roughly a decade on Wednesday, as the central bank continues its efforts to return to pre-crisis normalcy.

In a policy statement, the Fed announced it had raised its benchmark interest rate from 0.5 percent to 0.75 percent, up just a quarter point from the previous level set one year ago.

The central bank announced the hike following a two-day policy meeting in Washington. The hike was widely expected — Fed officials had said they would like to raise rates once more in 2016, and the December meeting was the final chance to do that. But it also represents a significant shift in how the Fed has operated since the financial crisis.

Wednesday’s hike came nearly one year to the day since the Fed’s last interest rate increase, which was a slight rise from the near-zero levels it had held in places for years in an effort to help push the U.S. economy through the recession.

While that first hike was a major milestone for the Fed, this second hike could be even more momentous, as it is likely to be followed by more interest rates hikes in a much shorter time frame.The Fed said it expects interest rates to remain at accommodative levels for some time, and believes the economy will likely develop in such a way that borrowing costs will only increase gradually.

The march back to more normal interest rate levels also comes at a major time of change for the U.S. overall. The hike comes just weeks before President-elect Donald Trump officially assumes control of the White House, alongside a Republican House and Senate that are expected to push for major policy changes on a host of fronts.

Many economists have warned that Trump’s vow to tear up existing trade agreements and enforce strict tariffs against foreign imports could rock the U.S. economy.

Ambitious GOP plans to slash taxes and regulations, and Trump’s vow to push a broad infrastructure spending package, could combine to form a potent short-term boost to the economy. But it could also pose long-term risks by potentially overheating the economy and encouraging inflation.

The Fed did not mention how policy shifts in Washington could impact the economy, but rather said in its statement that it expects “that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

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