Yesterday the U.S. Federal Reserve announced an increase of the target range for the federal funds rate by one-quarter of a percent, bringing it from .75% to 1%.
The decision comes against the backdrop of the Trump administration releasing their first budget today, which is expected to have an inflationary impact.
Chair of the Federal Reserve Janet Yellen stated in a news conference, “Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress.”
A statement released by the Federal Reserve indicated faith in a stable U.S. economy: “Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace.”
This increase boosted investor confidence. The price of gold was up over 2%, silver up 3%, and the Dow Jones closed up 100 points.
This marks the Fed’s third interest rate increase since cutting rates to almost 0% during the 2008 financial crisis. The rates were initially lowered to stimulate borrowing, as when people spend their borrowed funds the economy should improve based on increased cash flow. However, as more funds are spent there are concerns of inflation.
Raising the interest rates will combat inflation and encourage saving over spending. An interest rate hike indicates economic growth.
In response to a question about reducing the size of the Federal Reserve’s balance sheet – or tightening up after Quantitative Easing – Yellen commented, “Our short-term interest rate target is our key active tool of policy, we think it’s much easier using that tool to communicate the stance of policy. We have much more experience with it and have a better idea of its impacts on the economy.”
This raises the question many libertarians have been raising about the Federal Reserve: If their committee is unsure of the impact of quantitative easing, why was it done in the first place?
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