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Federal Reserve Increases Interest Rates

The Federal Reserve announced last week that it will increase short-term interest rates for the first time in seven years – offering a vote of confidence for the economy while promising cautious future steps to avoid undermining the recovery.

The Fed has kept interest rates at the minimum since the recession in an effort to stabilize and stimulate the economy. Last Wednesday, it announced it will raise interest rates to a target range of .25 to .5%. In her press conference announcing the increases, Federal Reserve Chairwoman Janet L. Yellen said rates would rise gradually, and Fed officials expressed privately that further increases would only occur if the economy continues to grow. The short-term rates are expected to increase by about one percentage point each year for the next three years.

“The economic recovery has clearly come a long way, although it is not yet complete,” Yellen said. “Room for further improvement in the labor market remains, and inflation continues to run below our longer-run objective. But with the economy performing well and expected to continue to do so, the Committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase monetary policy remains accommodative.”

After the announcement, multiple banks, including J.P. Morgan Chase, Bank of America and others said they would increase the prime rate, which affects the percentages on bank loans and late credit card payments, from 3.25% to 3.5%. The banks did not yet increase the payout rate for savings deposits, which typically is delayed months behind prime rate increases.

Industry views of the rate hike were generally positive, emphasizing the belief that increases would not create turmoil in the economy and would help promote long-term stability. “I believe a Fed rate hike will be beneficial to the economy and the markets because it will remove an important cause of uncertainty for all,” said Marc Simon, CEO of HALO Branded Solutions (asi/356000). “The Fed is likely to be very gentle and deliberate in terms of future rate increases.”

Opponents of a rate hike have espoused fear that an increase would torpedo the economic recovery and create panic in the stock market. With a third-quarter GDP of 2.1%, this will only be the third time since 1950 out of 118 rate hikes when the GDP was below 4.5%. Still, distributors and suppliers feel their actions, rather than the current state of economic growth, will determine their success in the near future. “Incremental interest rate increases by the Fed have already been factored into the market,” says Regina Broudy, president of Clayton Kendall (asi/162968). “For our industry, a flat economy is not necessarily a bad thing. In the absence of organic growth, our customers need to stimulate sales and we can do just that.”