The exterior of the Federal ReserveOver the course of the 20th century, the Federal Reserve has used interest rates as its primary weapon of monetary policy to react to the fluctuations of a changing market. In 2008 and onward, the organization opted to lower the interest rates to near zero, at an extremely low 0.25%, in order to increase the ease with which people were able to get loans. This was done as a way to spurn investment and spending so that the economy could begin to spring back. Now, after a long recovery, the economy is starting to look more and more healthy. To compensate for this recovery, the Federal Reserve has recently decided to raise interest rates once again, and will likely do so several times throughout 2016.

What was the hike?

While the interest rate has been steady at a 0.25% since late 2008, the Federal Reserve is now going to start to slowly raise rates to help returns on investments, and to reign in any unsteady loaning that may be occurring due to the low interest rates. In mid-December, they raised the rate to 0.5%, and will certainly raise it more over the next year.

Why now?

The Federal Reserve has stated that the economy is now strong enough to continue its current rate of growth on its own without the assistance of the Central Bank. There is strong backing in the information to confirm this. Currently, GDP has continued to steadily climb over the past several years (although it could grow a little quicker). The job market has also looked more and more robust, as the unemployment rate has dropped to an even 5% or lower. Wages are even beginning to climb again, and appear on trajectory to continue to do so, as we’ve examined on this blog before. It’s unclear exactly what range the Federal Reserve hope to land interest rates it. The process will include many small raises to allow the economy to adjust with the costs of borrowing between banks and the returns on investments continuing to rise.

Long term effects

The long term effects of this hike will likely be positive, and probably long overdue. The return on savings accounts will finally start to rise again, as they have been next to worthless for the better part of a decade. The interest rate increase will also hopefully increase inflation, due to an increase in the money supply. Currently, the Federal Reserve has stated that 2% should be the target mark for inflation, but it has been falling to nearly 1%, lately, which could be a dangerous case of deflation.