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Economy Updated: 19 Jan 2016

FED: The decade of 'cheap money' is over

Last December, the US Federal Reserve (FED) announced the first increase in interest rates in that country since June 2006. Here are the keys to see what this increase for the first time in a decade means.

fed resource economy

⇒What is the main reason? The Federal Reserve seeks to normalize monetary policy over the coming years.

 What is its rationale for this increase? The FED believes that the decline in the unemployment rate from 10% in 2009 to 5% today positions the economy very closely to achieving the first objective of its mandate: fostering full employment. It also considers that, if current trends continue, inflation will rise from its current level of 1.3% to 2% and it will thus achieve the second objective of its mandate: price stability.

⇒What are the benefits of this measure? The Federal Reserve believes it reduces the risk of the economy overheating in the future, which would subsequently require more aggressive rate hikes. The FED also believes that there may thus be less risk in some financial markets.

 What will the normalization process be like? This process will occur cautiously and gradually, allowing the FED to adequately assess the balance of risks and not jeopardize economic growth while avoiding a significant rise in inflation.

⇒ Will there be further increases in the short or medium term? To the extent that the FED is comfortable with the cycle of rises, it is possible that the pace will accelerate. However, the FED will be cautious and will be watching the performance of financial markets and the way in which the economy absorbs the monetary normalization to react properly in case it has to be more or less gradualist.

 Is this measure advantageous for people in general? For households, businesses and other countries the advantages of stronger economic growth should be higher than the negative effects of rising financing costs.