Recap of Yesterday’s Interest Rate Hike

The FOMC (Federal Open Market Committee) hosted a meeting yesterday and went through with the anticipated interest rate hike. The Federal Reserve raised the Federal Funds rate, which is the overnight borrowing rate between banks, to a 2 to 2.25% target. The prior target was 1.75 to 2.00%.

Why did the Fed raise rates?

The Fed has a dual mandate of monitoring inflation and unemployment in the economy. They want to find that perfect rate of growth by which the economy is growing at a healthy rate, but not too fast. When they raise rates, economic activity slows because it costs more for businesses to borrow. When rates are lowered, the opposite occurs, and economic activity increases.

The Fed’s goal is to help the economy to maximize its growth without hurting inflation. So, when they raise the interest rate, they believe there is risk that the economy may be overheating, and it wants to prevent against a risk of inflation.

What does this mean for the current economic growth we’ve been experiencing as an economy?

While the stock market slipped after news of the rate hike, this is merely a day-to-day fluctuation in the market, as the rate hike was a surprise to no one. We can expect this to slow GDP growth slightly over the next quarter and expect another rate hike in December, as well as 3 more in 2019. Until then, it’s anyone’s guess — but don’t expect economic slowdown anytime soon. The larger impacts may be seen in late 2019 or early 2020.

Let’s not forget: the current period of economic expansion is the 2nd longest on record.

Nevertheless, unemployment is the lowest it has ever been in the United States, wages are starting to rise, and inflation is right where the Fed wants it to be. If only it were that easy to keep it as is.