Casting aside concerns about the strong dollar and weakness in economies abroad, the Federal Reserve achieved an historic interest rate liftoff in mid-December.
Like a crowd watching a space launch, equity markets cheered the first rate rise in almost a decade, even though it was one of the most widely forecast events in Fed history.
Fed chair Janet Yellen rallied the unanimous support of the Federal Open Market Committee (FOMC), which determines monetary policy, for the increase in the target for the federal funds rate from near zero to a range of 25 to 50 basis points. “I feel comfortable about the fundamentals driving the US economy, the health of US households and domestic spending,” Yellen stated during a press conference.
The rate rise suggests the beginning of a normalization cycle that could see a quarter-point increase every quarter in 2016, according to the Fed’s expectations, or ‘dot plot,’ for interest rates. The Fed will continue to monitor inflation and employment to determine the pace of any future increases.
“While the Fed remains data-dependent, they appear to be willing to cast a wide net in terms of the economic data they will monitor, including financial and international developments,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. The shortfall in inflation received special attention from the FOMC, he says. The committee said in its statement that it “will carefully monitor actual and expected progress toward its inflation goal” of 2%.