The U.S. central bank raised the benchmark interest rate slightly on Wednesday, as data show the economy moving toward full employment and inflation is rising modestly.
Leaders of the Federal Reserve have been debating interest rate policy for two days in Washington, and they decided to raise rates one quarter of a percentage point (putting the rate in a range between three-quarters of a percent and one percent).
The Fed slashed interest rates nearly to zero during the recession to fight unemployment and encourage economic growth, but now say the recovering economy no longer needs so much help.
PNC Bank economist Gus Faucher said the consumers who drive most U.S. economic activity are "in good shape" with "more jobs and wages... increasing." A recent survey of key financial leaders by the Association of International Certified Professional Accountants shows the highest level of optimism about the economy in a number of years.
This is the second slight interest rate increase in a couple of months, and analysts are reading Fed statements closely for clues about how soon and how far rates will go up this year. Officials use higher interest rates to cool the economy and fend off inflationary spikes that could hurt growth.
A quarter percent increase for interest rates will cost U.S. credit card holders $1.6 billion more in interest expenses this year, according to experts at Wallethub.com. Experts at the website track credit card use and say higher costs will make it harder to pay off these bills, which they expect will reach an all-time high later this year.
Wallethub says it is a little harder to track exactly how much raising the benchmark interest rate will affect home and auto loans, but they say recent experience shows they are likely to become more expensive as well.
If officials keep interest rates too low for too long, they risk sparking an abrupt inflationary jump that could force the Fed to raise rates high and fast, disrupting the economy. Overall, the Fed is trying to guide the economy toward full employment while keeping price increases to about 2 percent a year. Raising rates too high, too fast, could risk stalling growth or even shoving the economy back into recession.