Federal Reserve raises interest rates after months of waitingJanuary 2017 / Share
The U.S. Federal Reserve Bank announced Dec. 14 that it would raise its benchmark interest rate for the first time in around a year - and much later than it had anticipated less than 12 months ago. The federal funds rate would move up 25 basis points to 0.75 percent. The news has broad implications, both good and bad, for businesses, workers and the American economy as a whole.
"Just about everyone can agree on one thing: The American economy is strong and growing."
The decision comes after a long period of uncertainty and disagreement among the Fed's Open Market Committee, the group of federal bank directors who gather to vote on all interest rate changes. This most recent increase was the first in recent memory when all 10 FOMC members were in unanimous agreement. According to The Wall Street Journal, this stood in stark contrast to recent meetings, when the views of the policy-makers differed wildly.
The FOMC's vote to raise interest rates now means that just about everyone can agree on one thing: The American economy is strong and expanding. That's great news for anyone with an income, a business or a bank account, because it means wages and revenue are expected to continue rising across the board.
Almost everything else, however, is subject to interpretation. A rate increase from the Fed also indicates economists predict inflation and the cost of borrowing money will increase. And while the general picture looks rosy for now, Fed officials are also pricing in new uncertainty at home and around the world.
What higher rates mean
The Federal Reserve, as the central bank of the U.S., is one of the largest financial institutions in the world. That means a huge amount of the world's money is tied up in it somehow. This is especially true because of America's financial reputation: When the U.S. borrows money, it never misses a payment, and it serves as a safe haven for long-term savings.
Ordinary consumer banks rely on the Fed for a lot of their savings and investing as well, which is why interest rate changes usually trickle down to their customers in some way. With interest rates rising, the Fed will charge higher fees for loans to these banks, and in turn, these banks will need to pass at least some of this cost onto borrowers. That means mortgages, car loans and credit card debt could all become slightly more expensive over the next year, assuming the Fed's predictions are accurate.
What we still don't know
Based on their latest statement, the FOMC said we could expect the interest rate to continue rising slowly for the foreseeable future. By the end of 2017, the majority of the group predicted the key rate to be around 1.4 percent. Beyond 2019, most agreed that the rate would be slightly less than or equal to 3 percent. This is in line with the pace at which the committee expected the U.S. economy to grow - forecasting a 1.9 percent GDP increase over all of 2016, but no more than a 2.1 percent increase for any of the next four years.
In essence, this means Fed economists are likely skeptical of President-Elect Donald Trump's promise to bring GDP growth as high as 4 percent annually. Much of this might have to do with the very fact of his presidency, which by most accounts was unlikely prior to Election Day. This is just the latest instance of global uncertainty that has nagged the Fed since the U.S. economy began a slow recovery in 2009. Almost every other developed nation, from Western Europe to Asia, has seen similar economic stagnation.
How should the average American with a checking and savings account react to this news? Ultimately, there's little reason to panic. While the cost of credit card debt may begin rising, this should be tempered by rising wages, better returns on investments and a strong job market. The Fed also chose to raise rates under the assumption that inflation would begin rising faster as well. This might make the prices of goods increase slightly.
With all of this to consider, these basic rules hold true regardless: Work to save more each month and pay down debt when you can.
The information provided is presented for general informational purposes only and does not constitute tax, legal, business or investment advice.