On Wednesday, December 16, the U.S. Federal Reserve raised its key interest rate for the first time since June 29, 2006. In its monetary policy statement, the Fed cited numerous reasons for its U.S. rate decision. However, the move was primarily designed to keep a lid on inflation.
It’s interesting that at the time of the last rate hike to 5.25 percent, its highest level in more than five years, the Fed said that rising energy costs and a growing economy “have the potential to sustain inflation pressures.”
At the same time consumer prices, fueled by surging gas costs, were rising at a 4 percent annual rate and appeared to be accelerating. Even excluding the volatile food and energy categories, prices were rising at a 2.4 percent annual rate, well above the Fed’s upper target of 2 percent. Other commodities were also soaring near all-time highs, especially gold and food commodities, driven mainly by the falling U.S. Dollar.
Economic conditions have changed considerably since the last rate hike. This time around, the Federal Open Market Committee hiked rates because it believes that economic activity has been expanding at a moderate pace. It said that household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further, however, net exports have been soft.
The FOMC also said that a range of recent labor market indicators continued to show further improvement…