Fed Looks beyond Market Turbulence & Raises Rates 25 Basis Points

December 16, 2015

Fed Looks beyond Market Turbulence & Raises Rates 25 Basis Points Photo

The Federal Reserve increased the target federal funds rate today, ending exactly seven years of its zero interest rate policy. With the decision, Fed Chair Yellen decidedly placed more importance on steadily improving labor market conditions over the rout in commodity prices and declining long-term inflation expectations. Today's heightened financial market volatility and global economic weakness further complicate the Fed's dual mandate of maximum employment and price stability.

Ironically, in December, 2008, the Fed justified moving the funds rate to zero by saying, "Meanwhile, inflationary pressures have diminished appreciably in light of the declines in the prices of energy and other commodities...." Without some degree of commodity price stability next year, the trajectory of additional rate increases will be significantly slower than current FOMC projections (the so-called Fed dot plot) and even raises the possibility of “one (rate move) and done.”

Tags: Viewpoints | Federal Reserve | Interest Rate | Janet Yellen

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