Fed raises rates, ending era of stimulus

The Federal Reserve is raising interest rates for the first time in nearly a decade, ending an era of prolonged economic stimulus that provoked intense criticism from Republicans on Capitol Hill.

The interest rate hike approved by the Fed is small — 0.25 percent — but it marks a major shift for the central bank, which made unprecedented moves to boost the economy after the 2008 financial crisis, including keeping interest rates near zero.

Federal Reserve Chairwoman Janet Yellen struck a balancing act Wednesday. Speaking at a press conference, she painted the rate hike as a sign of how much the economy has strengthened since the Great Recession. At the same time, she downplayed the significance of the hike, repeatedly stressing that the Fed is in no rush to drive borrowing costs up significantly.

“The economic recovery has clearly come a long way, although it is not yet complete,” she said. “The committee judged a modest increase…is now appropriate, recognizing that even after this increase, monetary policy remains accommodative.

“It’s only 25 basis points,” she added.

The Federal Open Market Committee (FOMC) was unanimous in the rate decision, which it attributed to “considerable improvement” in the labor market this year.

But officials at the central bank have to tread carefully because the policy change has the potential to upend financial markets and slow the economy’s momentum.

To that end, Fed officials had signaled for months that a rate hike was coming to ensure that investors would not be caught by surprise.

The Fed typically raises rates to keep inflation under control. However, inflation still lingers below the Fed’s 2 percent target, leading some to question why the central bank moved now to raise rates.

Yellen argued Wednesday that she wants to see the Fed take an extremely gradual path towards tightening monetary policy. By acting now, she contended, the Fed protects itself from having to move quickly to adjust policy, and the resulting economic turmoil that could result.

“We would like to avoid a situation where we have left so much accommodation in place for so long, that we overshoot [our] objectives,” she said.

In fact, Yellen argued that whenever a central bank did economic harm, it was because it moved too slowly in raising rates, leading to the type of dramatic policy swings she is trying to avoid.

“They’ve allowed inflation to get out of control, and at that point, they’ve had to tighten policy very abruptly and very substantially,” she said.

She also emphasized that after this first hike, the Fed is not on a preset course of future hikes. Rather, every policy shift will be made after reviewing the latest economic data and picking the right moment.

The political reaction to the Fed’s decision was critical across the board. Republicans that have spent years second-guessing the Fed were in no rush to heap plaudits on the central bank for finally agreeing with their calls to raise rates.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas), one of the Fed’s fiercest critics in Congress, said the policy shift came far too late.

“Unsustainably low interest rates clearly didn’t solve the problem or else Americans today wouldn’t be stuck in the slowest, worst-performing economic recovery of our lifetimes,” he said in a statement.

“Our economy would be healthier if the Federal Reserve was more predictable in its conduct of monetary policy, more transparent about its decision-making, and more accountable when regulating.”

And the rate increase also opened the Fed up to criticism from the left. Skeptical Democrats argue that many working families are still grappling with slow-growing wages, and need additional help from the Fed.

Sen. Bernie SandersBernard (Bernie) SandersChris Murphy’s profile rises with gun tragedies Clip shows Larry David and Bernie Sanders reacting after discovering they're related For now, Trump dossier creates more questions than answers MORE (I-Vt.) blasted the move, calling it “bad news for working families.”

Rep. Jan Schakowsky (D-Ill.) said it was “precisely the wrong choice at this moment in time.”

Yellen acknowledged that wage growth has been slow, but expressed confidence that the economy will continue to post gains even as the Fed begins to step off the gas.

“The underlying health of the economy, I consider to be quite sound,” she said. “The Fed’s decision today reflects our confidence in the U.S. economy.”

The increase is the first time the Fed has raised rates since June 2006. It also is the first time rates have not been near zero since December 2008, when then-Federal Reserve Chairman Ben Bernanke slashed borrowing costs in an effort to limit the economic damage of the financial crisis.

After lowering rates as far as possible using traditional Fed powers, the central bank entered uncharted territory. With the economy hemorrhaging jobs, the Fed embarked on three separate rounds of “quantitative easing,” massive bond purchases aimed at further driving down borrowing costs and injecting fuel into the economy.

The Fed also tried out “Operation Twist,” a 2011 initiative in which the Fed unloaded its shorter-term debt and bought up longer-term bonds.

Those efforts resulted in the bank buying up trillions of dollars in bonds and exposing its leaders to new levels of political pressure as Republicans regularly blasted the moves as ineffective and misguided. Former Texas Gov. Rick Perry (R), then a presidential candidate, called them “almost treasonous.”

This story was updated at 4:13 p.m.