The Fed Funds Rate Finally Raises

It’s been almost a decade since the Federal Open Market Committee (FOMC) last increased the target Federal Funds Rate, and today, the Federal Reserve (Fed) increased the rate for the first time since 2006 by 0.25%.

This first rate hike marks the beginning of more significant divergence in Central Bank monetary policy. Only a few weeks back the European Central Bank President, Mario Draghi, indicated the extension of their quantitative easing program until at least March 2017.

The Fed forecast for the Federal Funds Rate at the end of next year is 1.375% – which implies four quarter point increases during 2016. We view this measured pace akin to a “dovish” tightening as indicated by the FOMC statement: “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the Federal Funds Rate. The actual path of the Federal Funds Rate will depend on the economic outlook as informed by incoming data.”

The Fed gave a generally positive assessment of the U.S. economy and said its reasonably confident inflation will rise over the medium term, towards its 2% objective.

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