ARI SHAPIRO, HOST:
The Federal Reserve did it. After months of speculation and anticipation, the Fed's official interest rate has gone up. This is the first time that's happened since the rate was driven to near zero in December of 2008. The increase was small, and as NPR's John Ydstie reports, Fed officials made clear the process of raising rates to more normal levels will be gradual.
JOHN YDSTIE, BYLINE: After two days of meeting with her Fed colleagues, Janet Yellen sat down before reporters and said the decision had been made. The federal funds rate, the bank's benchmark rate would rise a quarter of a percentage point, and she noted the historic nature of the act.
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JANET YELLEN: This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.
YDSTIE: And Yellen was asked how regular Americans should view the Fed's action.
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YELLEN: The first thing that Americans should realize is that the Fed's decision today reflects our confidence in the U.S. economy.
YDSTIE: Yellen said the Fed's sees an economy that's on a path of sustainable improvement. She said the Fed believes it's nearing its goal of maximum employment, though she acknowledged there are still Americans who want jobs or full-time work and can't find it. But Yellen acknowledged the Fed is still far below its inflation goal. The Fed believes inflation of around 2 percent a year is best for economic growth, but its preferred inflation measure is running far below that. Yellen has blamed the huge drop in oil prices over the past year and a half for suppressing inflation, but a reporter pointed out that Yellen has said for months, that dip is transitory, but oil prices keep falling.
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YELLEN: I have been surprised by the further downward movement in oil prices, but we do not need to see oil prices rebound to higher levels in order for the impact on inflation to wash out. So all they need to do is stabilize.
YDSTIE: But with inflation so low, Yellen was asked, why the need to raise interest rates right now? The normal reason for a rate hike is to head off accelerating inflation. Yellen pointed out that rate hikes only work with a lag. They spread through the economy and have an effect on growth and inflation only slowly.
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YELLEN: What I - we would like to avoid is a situation where we have waited so long that we're forced to tighten policy abruptly which risks of boarding what I would like to see as a very long-running and sustainable expansion.
YDSTIE: In other words, she doesn't want to risk pushing the economy into recession. But Yellen also explained that raising rates gives the Fed a little more room to maneuver. If the economy now turns down unexpectedly, they can actually cut rates again. That room to maneuver will grow as the Fed gradually raises rates to more normal levels over the next few years. Financial markets responded positively to the rate hike. The major U.S. stock index has rose one and a quarter to 1-and-a-half percent. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
