WASHINGTON — The Federal Reserve
said on Wednesday that it would raise short-term interest rates for the
first time since the financial crisis, a decision it described as a
vote of confidence in the American economy even as much of the rest of
the world struggles.
The widely anticipated announcement — that the Fed would raise rates to a range between 0.25 percent and 0.5 percent
— signals the beginning of the end for the central bank’s stimulus
program. Fed officials emphasized that they intended to raise rates
gradually, and only if economic growth continues. Short-term rates will
rise by about one percentage point a year for the next three years, Fed
officials predicted.
Interest
rates on mortgages and other kinds of loans, and on savings accounts
and other kinds of investments, are likely to remain low for years to
come.
“The
economic recovery has clearly come a long way, although it is not
complete,” the Fed’s chairwoman, Janet L. Yellen, said at a news
conference after the announcement.
Exactly seven years ago, the Federal Reserve cut
interest rates to almost zero in order to nurse the ailing economy back
to health. Today, it is expected to change direction. This is how it
works.
The
decision “recognizes the considerable progress that has been made
toward restoring jobs, raising incomes and easing the economic hardships
that have been endured by millions of ordinary Americans,” Ms. Yellen
said. The Fed’s announcement came exactly seven years to the day after
the central bank cut its benchmark rate nearly to zero.
The
Fed is trying to tiptoe between two kinds of danger. It wants to raise
rates to improve its defenses against future risks, including higher
inflation or another economic downturn. But if it moves too quickly, it
risks undermining the current recovery.
It faces the additional challenge of increasing domestic rates while other central banks are holding rates down.
The
result, said Mohamed El-Erian, chief economic adviser at Allianz, is a
plan for the “loosest tightening” in the Fed’s modern history.
Move too quickly, Mr. El-Erian said, and the Fed could “cause severe market volatility, undermining economic conditions.”
Graphic
Why the Fed Raised Interest Rates
Officials said the economy was strong enough to keep
growing with a little less help from the central bank. They said rates
would rise slowly, but borrowing costs already have started to climb.
The
decision on Wednesday was the most important and riskiest step the Fed
has taken since Ms. Yellen became chairwoman in early 2014. Every other
developed nation that has raised rates since the end of the financial
crisis has been forced to backtrack as growth slowed.
Financial
markets took the news calmly. The Standard & Poor’s 500-stock index
rose 1. 5 percent to close at 2,073.07. The yield on two-year
Treasuries, closely tied to short-term interest rates, closed above 1
percent for the first time since April 2010.
Ms.
Yellen will now face the challenge of maintaining an internal consensus
over the pace of rate increases amid considerable economic uncertainty
and the political pressures of a presidential election year.
Ms.
Yellen won the support of all 10 voting members of the Federal Open
Market Committee, a victory that reflects the Fed’s tradition of
maintaining the appearance of consensus on major decisions.
Three
of those officials had argued in recent months that the economy might
not be ready for higher rates, a view shared by some economists and by
Democrats who argue that the Fed is prematurely curtailing job and wage
growth.
The Fed’s Statement
“The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”
