Last week, the Federal Open Market Committee raised the target range for the federal funds rate to a range of .25 to .50 percent. The funds rate had remained unchanged for several years at a range of 0 to .25 percent. The FOMC stated that since it last met in late October 2015, the economic activity has been expanding at a moderate pace.
Expanding economy. According to the FOMC, inflation is expected to rise to 2 percent over the medium term “as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.” In addition, it noted that household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further. The Committee also cited a range of recent labor market indicators, including ongoing job gains and declining unemployment.
Chain reaction. In a related action, the Federal Reserve Board voted unanimously to approve an increase in the primary credit discount rate—the interest rate charged for short-term credit extensions to depository institutions. The Fed also unanimously agreed to raise the interest rate paid on required and excess reserve balances to .50 percent, effective Dec. 17, 2015.
To implement the increase, the Fed issued a final rule amending Regulation D—Reserve Requirements of Depository Institutions (12 C.F.R. Part 204), effective Dec. 22, 2015.
Increased awareness. The Fed also updated a number of FAQs on its monetary policy to, among other things, increase the public’s awareness and understanding of recent decisions by the FOMC.
ABA’s reaction. In a Dec. 16, 2015, American Bankers Association release, Rob Nichols, the incoming ABA president and CEO, remarked, “Today’s action shows the Fed is confident that the economy is strong enough to handle a very gradual rise in rates. After years at historically low levels, it’s important to head back in the direction of more normal interest rates.”
