It has been a little over two years since the U.S. Federal Reserve began raising its official interest rate, known as the federal funds rate. In December 2015, the U.S. Fed increased its target range of the overnight cash rate by 0.25%, moving it away from what was essentially a zero interest rate for overnight or borrowing and lending between banks.
Since then, there have been another three increases. The Fed paused through 2016 but, in March 2017, it increased its official rate by another 25bps and then followed with two more increases of the same magnitude over the course of the rest of that year. U.S. interest rates were being “normalised” after seven years of sitting at extraordinarily low levels.
Now there has just been another increase. As expected, the Federal Open Market Committee (FOMC) announced another 25bps increase to the target range, taking the range to 1.50% to 1.75%. The actual rate at which day-to-day lending between banks occurs in typically towards the middle of this range, at what is known as the “effective” rate.
According to the FOMC statement, in recent months the “outlook has strengthened” and “job gains have been strong” while the annual inflation rate “is expected to move up in coming months.” However, the FOMC also noted household spending and business investment has recently “moderated from their strong fourth-quarter readings.”