The Background
The Federal Reserve last raised its benchmark interest-rate target in 2006. The federal funds rate is what banks charge one another to lend money overnight. This affects the rates financial institutions charge businesses and consumers for loans.
Since 2008, the central bank has held the federal funds rate in a range of zero to 0.25 percent to support the struggling economy and later to help its recovery. Another major economic stimulus effort in the wake of the financial crisis was the Fed’s quantitative easing program, in which it purchased billions of dollars of bonds each month starting in 2009, ultimately adding more than $3.5 trillion to its balance sheet.
The Issue
After stepping down monthly bond purchases in December 2013, the Fed brought its quantitative easing program to an end in October 2014. The move signaled the central bank’s growing confidence in the economy. However, officials cautioned that rates would not rise immediately. Federal Reserve Chair Janet Yellen said they would stay low for a “considerable time,” leaving investors speculating about the actual timing and size of increases.
Following the January meeting of the Federal Open Market Committee, Yellen said policymakers are unlikely to begin raising rates “for at least the next couple of meetings,” suggesting rates will be unchanged until midyear. The Fed is monitoring an improving labor market, but inflation remains below its 2 percent target. In addition, wages are stagnant, and Yellen cited global turmoil as a risk factor in January.
The Federal Reserve Board of Governors voted unanimously for the statement that followed the January meeting, but minutes show they hold diverse opinions on when rates should rise.
Tracking Fed Funds Forecasts, Rate Futures Volatility
Bloomberg’s Excel templates and volatility functions track Fed predictions and their effect on markets. Bloomberg charts Fed governors’ individual rate projections as well as interest rate curves on a “dots” plot.
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