Why did the Federal Reserve begin raising interest rates after seven years of keeping them near zero?

In March 2015, the FOMC indicated in its postmeeting statement that it anticipated that it would be appropriate to raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 2 percent objective over the medium term. In December 2015, the Committee judged that both of those tests had been met. Given the outlook for the economy and the fact that it takes time for policy actions to affect future economic outcomes, the Committee decided to raise its target for policy interest rates. The Committee noted in its statement that monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

The Federal Reserve pursues policy to promote the goals of maximum employment and stable prices set forth by the Congress in the Federal Reserve Act. During the global financial crisis, the FOMC cut short-term interest rates to nearly zero. To promote economic recovery, the FOMC then undertook a series of large-scale asset purchase programs and used its communications about the path of future policy rates (known as forward guidance). Since October 2009, the unemployment rate has fallen from its peak of 10 percent to 5 percent in November 2015. Inflation--as measured by the increase in the price index for personal consumption expenditures--has generally run somewhat below the FOMC's objective of 2 percent, averaging about 1-1/2 percent since the recession began in late 2007. Inflation was especially low in 2015, held down by declines in energy prices and in prices of non-energy imports. However, with the economy having strengthened considerably, the FOMC is reasonably confident that inflation will move back to 2 percent as energy and import prices stabilize and the economic expansion continues.


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Last Update: December 16, 2015