Probably the most anti-climatic event of the year occurred Wednesday when the Federal Reserve finally decided to raise short-term interest rates.
The action to raise the benchmark interest rate by 0.25 percentage points ends a long stretch of the Fed holding short-term rates near zero. Years of threats about raising the rate would send jitters through the stock market causing it to crater but not Wednesday.
The Dow Jones, industrial average reacted to the Fed’s decision on Wednesday by actually gaining 224.18 points, rising to 17,649.09. The euphoria over the Fed finally pulling the trigger, however, appeared to have worn off on Thursday with the Dow losing ground.
Markets overseas reacted positively Thursday to the Fed’s move. The rate change comes under the leadership of Federal Reserve Chairwoman Janet Yellen.
The Fed last increased the benchmark in June 2006. Back then it topped out at 5.25 percent. For comparative purposes, after Wednesday’s rate increase, the rate sits between 0.25 percent and 0.5 percent. That low rate has helped borrowers, but it has been a painful nine years for savers who depend on interest earnings.
For people who are buying homes, carrying a credit card balance, taking out loans or those with savings accounts, the rate change isn’t expected to have an immediate effect. Rates have been historically low for an incredibly long period.
That was to help jump start the economy to help pull it out of the Great Recession. Even though the recession was supposed to have ended in 2009, it has taken years for the unemployment rate to get to its current level of 5 percent.
That stability prompted the Fed action to boost the short-term interest rate without fear of triggering job losses. What the Fed will have to watch is the manufacturing sector, which has been negatively affected by the dollar’s strength in overseas markets.
In addition, energy prices remain incredibly low because of the oversupply of oil on the markets. That helps consumers, particularly for the holidays, but it hurts the oil producing industry and states that depend on the tax revenue.
Also worth watching is the weak global demand for products and efforts by many companies to reduce their inventory.
Yet, Fed officials predicted a set of forecasts published on Wednesday that they would raise interest rates about 1 percentage point a year over the next three years, reaching 3.3 percent by 2019.
That should bring a smile to the faces of people who hope to live on interest earnings from their retirement savings.