And she does it again. The Federal Reserve announced that the key short-term interest rate will be increased by 0.25%. This is the second time in three months. This takes the overnight funds rate to a target range of 0.75 percent to 1 percent.
The Federal Reserve cited steady U.S. growth, an improving labor market and greater confidence among consumers and businesses as its basis for raising the Fed Funds Rates. What’s surprising is that the rate hike was followed by a stock market rally. I think the primary reason is that the rate hike signals an improving economy and increased investor confidence.
The likely impact of an increased fed funds rate is it will raise the cost of borrowing. The interest rate of mortgages and most other loans for businesses and consumers are tied to this benchmark rate.
The Fed’s decision to raise interest rates is likely to put pressure on other central banks to take similar action. The good news is that the Federal Reserve is cautious about raising rates and only will do so if the economy continues improving. The next rate hike may be in June and December.