February 19, 2016
After seven years of near-zero interest rates, the U.S. Federal Reserve took a significant step toward normalizing monetary policy on Dec. 16. The target federal funds rate — the rate at which banks lend to each other overnight — increased by 25 basis points, to a range of 0.25 to 0.5 percent.
The Fed held the rate near zero for so long in response to a global financial crisis and recession, but this interest rate increase marks a new chapter in the life cycle of the economy.
Janet Yellen, Chair of the Federal Reserve’s Board of Governors, said the move indicates that the U.S. economy will continue to expand at a moderate pace, and the unemployment rate will keep improving.
“This increase is a vote of confidence from the Fed,” says David Mook, Chief Private Banking Officer for The Private Client Reserve. “It sends a signal about the economy, and I think it’s good news.”
What other rates will this affect?
Rising interest rates have important implications for both banks and individual investors. While borrowers likely will pay more for variable-rate loans upfront, it might be a longer period until savers receive a higher rate of return on deposits.
Floating interest rates on loans, for instance, are generally tied to an index such as the prime rate or LIBOR (London Interbank Offered Rate), Mook