NEW YORK – America’s first interest rate hike in nearly a decade is here.
The Federal Reserve raised its key interest rate on Wednesday from a range of 0% to 0.25% to a range of 0.25% to 0.5%.
The rate hike is a small one, but it will affect millions of Americans, including investors, home buyers and savers. Savers will eventually see a little more interest on their deposits at the bank, and mortgage rates will gradually rise.
The move was widely expected. It is a sign of how much the economy has healed since the Great Recession. The central bank believes the U.S. economy is strong now and no longer needs crutches.
“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably that confident inflation will rise,” the Fed said in its statement.
Stocks rallied with the Dow rising over 100 points after the announcement. Investors were pleased to see that the Fed expects “only gradual increases” in interest rates next year.
The Fed put interest rates near zero during the financial crisis in December 2008 to help stimulate the economy and boost the collapsed housing market.
But the economy is no longer in crisis. In fact it is a lot healthier — unemployment now is at 5%, half of the 10% rate it hit in 2009 during the worst of the jobs crisis.
Over 12 million jobs have been added since the recession ended. Wages — which have barely grown during the recovery — have also started to pick up recently.
On Wednesday, the Fed’s committee improved its economic outlook. Compared to its last forecast in September, the Fed raised its expectations for economic growth next year to 2.4% from 2.3%. It also lowered its projection for unemployment in 2016 to 4.7% from 4.8%.
The Fed still has low expectations for inflation — a key measure when it decides to raise rates again. The Fed’s target for inflation is 2%, but right now its close to zero. The Fed sees inflation inching up in the years to come, but not hitting 2% until 2018.
Known as “liftoff,” the Fed’s action is expected to be the first of more rate increases that will probably come in 2016. The last rate hike was June 2006. It was the culmination of a steady series of rate hikes that began two years prior.
Stay tuned: Yellen speaks at 2:30 p.m. and will offer more insights into the Fed’s historic decision.