Seven years ago, the Federal Reserve Bank pushed its target specific to a federal funds rate to incredible lows. The 2008 and 2009 financial crisis period was extremely troubling. Since then, virtually every step, including market tantrums, bond buying, and innovations with communication, seemed to increase anxiety pertaining to the US economy.
Now, the seven-year experiment consisting of near-zero interest rates is coming to an end, according to the Federal Reserve Bank. The Fed announced that its benchmark rate is being raised. In addition, the Fed stressed that it had a plan to lift that benchmark rate over the next three years in a gradual manner. Some insiders believe that the rates people have enjoyed for the past seven years will return within the next five years.
The decision the Fed made is a direct reflection of confidence regarding the US economy. In a press conference, Fed Chairwoman, Janet Yellen, stated that substantial improvement has been seen with conditions in the labor market, and that while things remain uneven across the country and through different industrial sectors, the path of sustainable improvement is clear.
As expected, the Fed’s announcement caused a ripple effect around the world. For this and other reasons, it is moving ahead with caution. For starters, the benchmark federal funds rate will go from near zero to 0.25 percent and 0.5 percent. However, based on the economic performance, the Fed may need to adjust its strategy.
Making the Next Move
The next move made by the Federal Reserve Bank will depend on the evolution of inflation. As Yellen explained, inflation must be monitored closely. If things do not pick up, further action may be required, including an appropriate policy being put in place. At least for now, officials agree that they feel relatively confident that inflation will increase, because of improvement with the domestic economy.
However, as expressed by chief economist at the AFL-CIO, William Spriggs, the real economy continues to struggle. He stated that raising rates and committing to an additional increase down the road was a mistake made by the Fed. Spriggs believes the Fed’s move will cause the economy to slow, and that workers will be damaged during a time when homeowners are still recovering.
Bank of America Corp, JP Morgan Chase, and Wells Fargo just announced that they will increase the prime lending rate for loans and credit cards. For commercial real estate, no one is certain what the impact will be to commercial real estate. If nothing major happens, there may be very little difference. For now, it is more of a wait and see game with the US economy and inflation.
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