Washington, 16 December 2015 – For the first time since 2006, the Federal Reserve has raised rates of the Federal Funds interest of 0.25%, thus bringing them in a band between 0.25% and 0.50% from the previous range between zero and 0.25%. It was nine years that the cost of money in the US was not increased.
The Fed has also set at 0.25% interest rate for operations ‘reverse repos’, designed to accompany the first rate hike since 2006 with a reduction in excess liquidity in the system, estimated at 3,000 billion dollars. Whether a ‘repo’, serving instead to increase liquidity in the system, the banks compete in an auction to win a loan from the central bank, in a ‘reverse repo’ is the central bank that asks for money in lending institutions, which contribute to the rate at which offer loans to the central bank receiving side that, in the case of the Fed, is normally a government bond.
The market will have a fundamental role in the proper functioning of the US monetary policy. For operations of ‘reverse repo’ will be made available as collateral Treasury securities for about 2,000 billion dollars. It ‘was instead set to 0.5% the IOER , or the rate on excess reserves’ parked’ by banks at the Federal Reserve Bank in their district. In theory, this should ensure that banks lend money at a rate at least higher than the IOER.
In essence the ‘reverse repos’ and IOER are the two main instruments through which the Fed makes its monetary policy decisions are reflected in the cost of credit, the dynamics that are neither automatic, nor granted.
Another step should be emphasized in the release of the Fed is where it is expected that “will maintain the current policy of reinvesting payments of bonds and mortgage-backed securities” in similar activities. Translated: the huge amount of corporate bonds, securitizations and toxic assets ended up in the belly to the Fed at the time of the bank bailouts is going to stay where it is for quite some time.
The US central bank in a statement points out that the forecasts on the US economy will contribute to make the next interest rate hikes are “only gradual” . Today’s decision to increase the cost of borrowing was unanimous.
Soon after the announcement Wall Street and reacts by speeding back up sharply, after a phase fluctuating. Both the Dow Jones Nasdaq advancing 0.72%.
The dollar advances following the Fed’s decision. The euro changed hands for $ 1.0895, down to below 1.09 while the proportion drops to 122.24 yen on the greenback.
The Fed, says the statement issued, “with gradual adjustments of monetary policy, Economic activity will expand at a moderate pace and the market work will be strengthened “. “In determining the timing and amount of future changes in interest rates,” the Fed “will assess the conditions and forecasts relating to the objectives related to employment and inflation.”
In this regard, the Fed is “reasonably confident that inflation ascend gradually ” up to “ 2% in the medium term”. “Recent labor market indicators have confirmed that the under-utilization of human resources in the labor market has dropped considerably in the beginning of the year,” notes the Fed still. Some indication on the roadmap of future gains after a survey among the board members on Fed interest rate it deemed “appropriate” in the coming years, equal to 1.375% at the end of 2016, to 2.375% at the end of 2017 and 3.25% at the end of 2018, with a medium-term objective the 3.5%.
Improved forecasts GDP growth and the US unemployment rate, now seen respectively 2.4% and to 4.7% in 2016 (2.3% and 4.8%, according to previous estimates). Estimates unchanged on 2015 (GDP + 2.1%, unemployment at 5%) and 2017 (GDP + 2.2%, inflation stable at 4.7%). Revised downwards the estimates on inflation ‘core’, expected at 1.3% in 2015 (1.4% according to the previous forecast), 1.6% in 2016 (1.7% previously), to ’1.9% in 2017 and 2% in 2018.
The Federal Reserve, Janet Yellen , in a press conference: “The first rate hike since 2006 marks The end of an era extraordinary “. The rise in “modest” rate is defined by Yellen “appropriate” since “reflects the confidence that the economy will continue to rafforarsi”. Future actions of monetary policy, said the first woman at the helm of the Fed, “will depend on how the economy evolves.” Again Yellen points out rates are still “unusually low and probably destined to rise only slowly.” And once again, Yellen said that “the importance of the initial rise in interest rates should not be exaggerated.”
Do not “to overstate the importance of the first rise ” rate interest in the USA. And ‘the warning issued by the Federal Reserve chairman. Yellen also stressed that “ takes time because monetary policy decisions have an impact” and that the pace of future increases will depend on the economy.
The price the oil “must stabilize ” and “there is probably a limit” to his downfall. Yellen said she was “surprised” by the sharp drop in prices, which remains under strong pressure inflation still far from the targets. Yellen has guaranteed that if, after which stabilized the oil price and the exchange rate of the dollar, inflation will continue to rise not , the US central bank “will take appropriate action.”
“I’m not worried about a new recession” provides the Fed chairman, explaining that he “bullish on the fundamentals of the American economy.” Some observers say that the rise in interest rates could accelerate a downturn in the economy and labor market.
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