For the first time in nine years, the Federal Reserve raised interest rates, at 0.25% on December 16. Key indicator to the unanimous decision is the low unemployment figure currently at 5%. Fed Chair Janet Yellen also mentioned about oil prices being lower and the fact that they only need to stabilize for that to stop putting further pressure on inflation. This was the first increase since the panel pushed the key rate to 5.25% on June 29, 2006. The committee also took the rate to zero on December 16, 2008.
Although the move suggests that the Fed now has confidence the U.S. economy will improve since the financial crisis, many experts suggested that the Federal Reserve made too quick of a decision and that they could have just waited. Investors’ reaction to the anticipated announcement was muted on the day of the announcement. The days following were not so dull. All the major indices we off by more than 1% each day to close the week. The DOW on Friday closed down a whopping 367 points down. This was because of the big drop in oil, as well as large sell offs in high yield bonds.
For the consumer, the interest rate hike simply means the following:
1. The Fed is basically increasing the rate of borrowing money. A ripple effect will be felt on any loan by any consumer.
2. Gross Domestic Product is growing slowly, but steadily.
3. Your monthly interests on mortgage, student loan, credit cards will go up immediately.
Will it still go up? It depends on how well the economy will perform in the coming months before we can see if the Fed really did make the right decision.