Fed Raises Key Interest Rate for First Time in Almost a Decade - New York Times

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.”

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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.”