Fed finally lifts key interest rate from near zero
Federal Reserve raises key interest rate by quarter-point, ending 7 years of near-zero rates
December 16, 2015 11:09 PM
Susan Walsh/Associated Press
Federal Reserve Chair Janet Yellen speaks during a news conference in Washington, Wednesday, following an announcement that the Federal Reserve raised its key interest rate by quarter-point.
Richard Drew/Associated Press
Jeffrey Vazquez, right, works with fellow traders on the floor of the New York Stock Exchange on Wednesday.
From staff and wire reports
The Federal Reserve on Wednesday announced its first interest rate hike in nine years, a widely anticipated move that raises rates from record lows set at the depths of the 2008 financial crisis.
The shift could herald modestly higher rates on some loans, but the central bank signaled that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.
The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates.
Pittsburgh investment analysts said the Fed’s one small step should help eliminate market distortions caused by chronically low interest rates, which forced investors to take on more risk if they wanted more than paltry yields. That propelled more investors into stocks, which has been a major reason why the S&P 500 index has tripled since the stock market hit bottom in March 2009.
“The Fed’s stimulus program has been great for stock investors,” said John Frankola of Vista Investment Management in Pittsburgh. He said stock investors were so enamored with the zero interest rate policy that they reacted positively to bad economic news because they hoped it would prompt the Fed to keep rates low.
“It’s like we’ve been living in bizarro world where bad news is good,” Mr. Frankola said. “Hopefully, the first rate hike will mark a turning point in which the market consistently reacts favorably to good economic news.”
On Wednesday, the Dow Jones industrial average climbed 224 points, or 1.3 percent, to 17,749. The Standard & Poor’s 500 index gained 29 points, or 1.5 percent, to 2,073. The Nasdaq composite rose 75 points, or 1.5 percent, to 5,071.
The bond market didn’t react much. The yield on the 10-year Treasury note held steady at 2.28 percent, little changed from early in the day.
Wednesday’s action conveys the central bank’s belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand modestly higher borrowing rates.
“The Fed’s decision today reflects our confidence in the U.S. economy,” Chair Janet Yellen said at a news conference.
Kim Forrest, senior equity analyst with Fort Pitt Capital in Green Tree, welcomed the increase, saying she thought the economy was strong enough to support the decision. “This is a step back to normalcy,” she said.
Ms. Forrest is not expecting rates to ratchet higher quickly, a widely held view. She believes the Fed’s next move higher may not come until after next year’s presidential election.
Because the rate hike was so widely anticipated, much of its impact is already reflected in market prices.
Mr. Frankola said another distortion that higher rates could curb is the practice of companies borrowing at low rates to buyback their stock instead of investing in their business.
Critics consider the tactic financial engineering that boosts stock prices and executive pay.
“As interest rates go up, there will be less of that going on,” Mr. Frankola said.
The Fed’s action isn’t expected to affect rates on mortgages and car loans anytime soon. The Fed’s benchmark rate doesn’t directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys.
Rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed’s rate hikes remain modest.
Shortly after the Fed’s announcement, major banks, including Pittsburgh-based PNC Financial Services Group, began announcing that they were raising their prime lending rate from 3.25 percent to 3.50 percent. T
he prime rate is a benchmark for some types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike.
Ms. Yellen indicated Wednesday’s rate hike by the Fed was partially defensive. If rates stayed at near zero, the Fed might not have the tools to combat a recession. When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy.
By staying close to zero, the Fed would be unable to cut rates or it would be forced to have negative rates for the first time in its history.
The Associated Press and Post-Gazette reporter Len Boselovic contributed.