U.S. Federal Reserve on Wednesday decided to raise benchmark interest rate by 25 basis points, the first interest rate increase since 2006 and marking the end of an era of extraordinary easing monetary policy.
"Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the (Federal Open Market) Committee decided to raise the target range for the federal funds rate to 0.25-0.5 percent," the Fed said in a statement after concluding its two-day policy meeting on Wednesday.
The central bank holds that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise to its 2 percent target over the medium run.
"This action marks the end of an extraordinary seven-year period during which the Federal Reserve funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression," the Fed chairwoman Janet Yellen said at a press conference on Wednesday.
CONFIDENCE IN ECONOMIC OUTLOOK
With gradual adjustments in the stance of monetary policy, the U.S. economy will continue to expand at a moderate pace and labor market will continue to strengthen, said the central bank in the statement. Fed officials also see the risks to outlook for both economic activity and the labor market as balanced.
"Although developments abroad still pose risks to U.S. economic growth, these risks appear to have lessened since last summer," said Yellen.
According to a projection report released on Wednesday, Fed officials expected the U.S. economy will grow 2.4 percent in 2016, slightly higher than their September forecast of 2.3 percent. The unemployment rate will further fall to 4.7 percent in 2016, lower than their September forecast of 4.8 percent.
"The U.S. economy has exhibited enough strength over the past year, and the unemployment rate has fallen far enough that raising rates by 25 basis points will not derail the U.S. expansion," David Stockton, a former Fed economist and now senior fellow at the Peterson Institute for International Economics (PIIE), told Xinhua.
In regard to concern of raising interest rate in a persistently low inflation environment, Yellen explained that transitory factors that are holding down the inflation, such as low oil prices and a strong U.S. dollar, are expected to abate over time, and diminishing slack in labor and product markets should put upward pressure on inflation as well.
As it takes time for monetary policy actions to affect future economic outcomes, it is appropriate for the Fed to take action now in order to avoid overheating the economy and overshooting the inflation target, according to Yellen.
