The waiting is over. On Wednesday, the Federal Reserve raised its benchmark interest rate by a quarter percentage point, bringing the target range to 3.75%–4.00%. It was the central bank's first rate increase in more than three years, and the vote was unanimous — a notable show of unity after three officials had pushed for a hike back in July. Chairman Kevin Warsh pointed to three factors behind the decision: a strong economy and labor market, inflation that stayed elevated over the summer, and geopolitical developments that have pushed energy prices higher.
The message from the Fed is that inflation — now above its 2% target for more than five years — remains the top priority, and this may not be the last move. The Fed's updated projections showed that 16 of 18 officials expect at least one more rate increase this year, with a few penciling in two. Markets took the news in stride: because a hike was widely expected, the S&P 500 and Nasdaq actually finished the day in positive territory. The bigger surprise would have been no hike at all.
What does this mean for investors? Higher rates make borrowing more expensive — mortgages, auto loans, and credit cards — but they also mean better yields on savings, money markets, and short-term bonds. For long-term investors, the takeaway is the same as always: the Fed's moves were well telegraphed, markets have largely priced them in, and a quarter-point change is no reason to abandon a sound investment plan. We'll be watching the data — and the Fed's next meeting — closely.
Source: Federal Reserve, CNN Business
Important note and disclosure: This article is intended to be informational in nature; it should not be used as the basis for investment decisions. You should seek the advice of an investment professional who understands your particular situation before making any investment decisions.
