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Federal Reserve Increases Overnight Rate to .5%

The federal reserve today increased the overnight lending rate by a quarter percentage to 1/2 a percent. This is the first increase in nearly a decade dating back to 2006. Increasing the benchmark rate is an indicator that the American economy is starting to not only improve but is becoming resilient as well.

The increase means major lenders now borrow at a higher rate. Eventually there will be a trickle-down effect that will impact the consumer as well.

The increase coincides with the Fed’s goal of maintaining a 2% inflation target.

Their statement sites the improved conditions and the labor market as a primary indicator of overall economic health.

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 percent objective.

Other factors considered in the rate increase include:

Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

Although the current interest rate at half a percent seems paltry, it pales in comparison to the one time zero-overnight lending rate seen at the lowest point in the 2008 economic downturn.

The Fed revisit the overnight rate in quarterly announcements. The next one will be in March.

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