US Fed moves to end easy money policy, raises rate to 0.25-50%

17 Dec 2015

Janet YellenThe US Federal Reserve on Wednesday announced the much-awaited move towards normalisation of monetary policy, raising the target rate for the federal funds to 0.25-0.50 per cent, from the current 0-0.25 per cent. The FOMC also forecast that the target rate for the end of 2016 would be 1.375 per cent, indicating another 100 basis points hike over 2016.

Fed chairperson Janet Yellen has managed the path towards monetary policy normalisation quite smoothly.

Markets seem to have taken the rate hike in stride and were not perturbed by the Fed move to make dollar costlier. But, a 0.25 per cent rate is not going to make dollar costly considering the enormity of funds available for investment.

While there was a sharp sell-off in financial markets prior to the September FOMC meeting, markets have now been cool to the Fed decision to raise rate.

FOMC said, on the basis of the current economic outlook, and considering the time it takes for policy actions to affect future economic outcomes, it decided to raise the target range for the federal funds rate to 0.25 to 0.50 per cent.

The stance of monetary policy, however, remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 per cent inflation, an FOMC release stated.

The committee noted considerable improvement in labor market conditions this year, and said it was reasonably confident that inflation will rise, over the medium term, to its 2 per cent objective.

FOMC said future adjustments to the target range for the federal funds rate would depend on the expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation.

The committee, however, anticipate that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

The committee said it will continue with the existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and rolling over maturing Treasury securities at auction, until normalisation of the level of the federal funds rate is well under way.

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