On Dec. 16, the Federal Open Market Committee issued a statement saying that they would raise the target range for short-term interest rates, saying that “there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. 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 to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
“The committee currently expects that with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace, and labor market indicators will continue to strengthen,” said Federal Reserve Chair Janet Yellen at a press conference on Wednesday. “Although developments abroad still pose risks to U.S. economic growth, these risks appear to have lessened since last summer. Overall the committee sees the risk to the outlook for both economic activity and the labor market as balanced.”
On the timing of the rate hike, Yellen said, “We decided to move at this time because we feel the conditions that we set out for a move – namely, further improvement in the labor market and reasonable confidence that inflation would move back to 2 percent over the medium term – we felt that these conditions had been satisfied. We have been concerned, as you know, about the risks from the global economy, and those risks persist. But the U.S. economy has shown considerable strength. Domestic spending that accounts for 85 percent of aggregate spending in the U.S. economy has continued to hold up; it’s grown at a solid pace. And while there is a drag from net exports from relatively weak growth abroad, and the appreciation of the dollar, overall, we decided today that the risks to the outlook for the labor market and the economy are balanced.”
Stock markets rallied on Dec. 16, with the Dow Jones Industrial Average gaining 224.18 points (1.28 percent) to 17,749.09. The NASDAQ Composite Index gained 75.78 points (1.52 percent) to 5,071.13. The S&P 500 Index gained 29.66 points (1.45 percent) to 2,073.07. The Russell 2000 Index gained 17.17 points (1.52 percent) to 1,148.72.
Precious metals advanced slightly, with gold gaining $11.50 (1.08 percent) to $1,073.10 per ounce. Silver gained $0.41 (2.98 percent) to $14.18 per ounce. Platinum gained $19.40 (2.27 percent) to $875.20 per ounce. Palladium gained $4.50 (0.79 percent) to $571.45 per ounce.
Crude oil lost $1.72 (4.61 percent) to $35.63 per barrel. Bitcoin lost $10.88 (2.34 percent) to $454.62. The interest rate on U.S. 10-year Treasury bonds gained 0.03 percent to 2.2959 percent.
Other details released on Wednesday show that the Fed’s inflation of the monetary supply is not having their desired effect of increasing prices at a rate of 2 percent per year, with their latest projections predicting increases of 0.4 percent for 2015, 1.2-1.7 percent for 2016, 1.8-2.0 percent for 2017, and 1.9-2.0 percent for 2018. Longer-term projections are still at 2.0 percent.
The projected U-3 unemployment rates for 2015-18 were revised downward from the September projection to 5.0 percent for 2015, 4.6-4.8 percent for 2016 and 2017, and 4.6-5.0 percent for 2018. Longer-term projections were revised downward to 4.8-5.0 percent.
The projected annual growth in gross domestic product (GDP) for 2015 was revised downward from the September projection to 2.1 percent. The 2016 projection was narrowed to 2.3-2.5 percent, the 2017 projection was revised downward to 2.0-2.3 percent, and the 2018 projection remained at 1.8-2.2 percent. Longer-term projections remained at 1.8-2.2 percent.
The federal funds rate for 2015 was revised upward from the September projection to 0.4 percent. The 2016-18 projections were revised downward to 0.9-1.4 percent for 2016, 1.9-3.0 percent for 2017, and 2.9-3.5 percent for 2018. Longer-term projections were revised downward to 3.3-3.5 percent.
These projections would seem to indicate that the current policies of the Fed are not helping the economy to recover, and are merely sustaining it artificially. The Keynesian school of economics explains this through the concept of a liquidity trap, while the Austrian school of economics explains this through the concept of malinvestment.