The Fed and Interest Rates

Wednesday’s release from the two-day Open Market Committee of the Federal Reserve confirmed what had been expected since the beginning of the tapering of the easing began in winter 2014. Citing strong job gains and continued economic improvement, Fed Chair Janet Yellen reported that the FOMC concluded that the U. S. could tolerate slightly higher borrowing costs. In signaling that it would raise rates – probably in June – the Fed also estimated that its funds rate would only climb to 0.625% by December. That’s roughly half what it estimated the rate would be just three months ago.

So what we got was rates going up sooner but slower. The investment markets seemed to like that kind of certainty, reversing early day losses and finishing up more than 200 points higher.

For a little perspective check out the graph below that shows interest rates for the past couple generations. At four times the current rate level, interest rates would still be lower than 42 of the last 50 years. Still a good time to borrow.

Federal_Funds_Rate_1954_thru_2009_effective.svg

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