The Federal Reserve is raising interest rates after seven years of record lows. But it's signaling that further rate hikes will likely be made slowly as the economy strengthens further and muted inflation rises.
The Fed's move to lift its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent ends an extraordinary seven-year period of near-zero rates that began at the depths of the 2008 financial crisis. Consumers and businesses could now face modestly higher rates on some loans.
The Fed's action reflects its belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand higher borrowing rates. But the statement announcing the rate hike said the committee expects "only gradual increases" in rates going forward.
Rates on mortgages and car loans aren't expected to rise much 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.
— Associated Press
What will the Fed's rate hike mean for SoCal? Not much, economists say
Wednesday's announcement from the Fed met with little concern from some Southern California economists.
SoCal manufacturers who export goods will have to adjust to their products becoming slightly more expensive abroad, said Robert A. Kleinhenz, chief economist at the Los Angeles County Economic Development Corporation.
“Export-oriented firms, manufacturing, as well as the goods movement side of our economy will be under pressure because the higher value of the dollar will make it harder to export,” he said.
However, Kleinhenz points out a much greater share of the local economy is dependent on imports, which will continue to benefit from a stronger dollar.
Overall, he expects California’s economic and job growth to continue to outpace the rest of the country’s during the next few years.
“I don’t think the momentum of the local economy will be diminished by this rate hike or rate hikes in the foreseeable future,” said Kleinhenz.
Another reason why there will be little impact on the economy is that Wednesday’s rate hike was not only highly anticipated, but also tiny: Just 0.25 percent.
“That’s a very small increase in rates, so the overall impact will be very minor,” said Jerry Nickelsburg, a Senior Economist at UCLA’s Anderson Forecast.
Nickelsburg also says the local economy could benefit from the increased spending power of people on fixed-incomes.
“Higher interest rates mean they will have more income,” said Nickelsburg. “So, we’re not looking for this to derail the expansion.
Does Wednesday's rate hike portend more to come?
For months, Chair Janet Yellen and other Fed officials have said they expected any rate hikes to be small and gradual. But nervous investors have been looking for further assurances.
The central bank's target for the federal funds rate — the interest that banks charge each other — has been at a record low between zero and 0.25 percent since December 2008. At the time, Fed officials led by Ben Bernanke were struggling to contain a devastating financial crisis that triggered the worst recession since the Great Depression.
The recession officially ended in June 2009. But unemployment kept rising, peaking at 10 percent before starting to fall. The jobless rate is now at a seven-year low of 5 percent, close to the Fed's target for full employment.
After the financial crisis, the Fed turned to other extraordinary measures, including a series of bond purchases intended to shrink long-term loan rates. The Fed ended the purchases in October 2014, though it's kept credit loose by reinvesting its bond holdings.
Those enormous holdings will complicate the Fed's efforts to raise its target rate. But the central bank has tested other tools to help it achieve the increases it wants in the funds rate.
Some analysts expect the Fed to raise rates at every other meeting in 2016, for a total of four quarter-point moves. Others think that after Wednesday's hike, the Fed could wait until June before raising rates again.
While Fed officials want to move slowly, an acceleration in inflation could force them to raise rates more quickly. Right now, the Fed's preferred price gauge is up a scant 0.2 percent over the past 12 months. Even excluding volatile energy and food, prices are up just 1.3 percent.