Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft despite some stabilisation in the energy sector
The Federal Reserve has increased its key interest rate by 0.25 per cent for the first time in a year in response to a strengthening US economy. “Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by one quarter percentage point, bringing it to one half to three quarters per cent,” Janet L Yellen, Chair of the Federal Reserve System Board, told reporters at a news conference yesterday. This is only for the second time in a decade that the Federal Reserve has raised its rate. The other one was in December 2015.
“In doing so, my colleagues and I are recognising the considerable progress the economy has made towards our dual objectives of maximum employment and price stability. The committee judged that a modest increase in the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and two per cent inflation,” she said. Yellen said economic growth has picked up since the middle of the year.
Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth.
Business investment, however, remains soft despite some stabilisation in the energy sector, she said. “Overall, we expect the economy will expand at a moderate pace over the next few years. Job gains average nearly 180,000 per month over the past three months, maintaining the solid pace that we’ve seen since the beginning of the year.
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“Over the past seven years, since the depths of the great recession, more than 15 million jobs have been added to the US economy. The unemployment rate fell to 4.6 per cent in November, the lowest level since 2007 prior to the recession,” the Federal Reserve Chair said. The Federal Reserve Board, Yellen said, continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives.
“That is based on our view that the neutral, nominal federal funds rate, that is, the interest rate that is neither expansionary nor contractionary, and keeps the economy operating on an even keel, is currently quite low by historical standards. “With the federal funds rate only modestly below the neutral rate, we continue to expect that gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years,” Yellen said adding that this view is consistent with participants’ projections of appropriate monetary policy.