http://thehill.com/policy/finance/263475-fed-raises-rates-ending-era-of-stimulusBy Peter Schroeder - 12/16/15 02:00 PM EST
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.
With the recovery seemingly on track, the Fed says the time is right to take the first step toward a tighter monetary policy.
The Federal Open Market Committee (FOMC) was unanimous in the rate decision, which it attributed to “considerable improvement” in the labor market this year.
“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate,” the FOMC said in a statement.
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.
Fed Chairwoman Janet Yellen sent the strongest signal of all earlier this month, which she said a failure to raise rates in a timely fashion would increase the risk of another recession.
The increase will be 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.”
The backlash stirred talk of legislative action on Capitol Hill, with some Republicans pushing to audit the central bank and others pushing legislative proposals to overhaul how the Fed does business.
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.”
With the rate hike now in place, the pressure on the Fed is likely to come from the left.
Liberals are urging the bank to move slowly on raising rates, warning that the economy is more fragile than it seems. They say wages have not kept up with the overall economic gains, holding back growth.
