Economists: Fed Rate Decision Based on Upbeat View of Economy, Market Readiness

Staff Report From Georgia CEO

Friday, December 18th, 2015

The U.S. Federal Reserve's decision to raise interest rates was based on an assessment by Fed policymakers that the U.S. economy was headed in the right direction and ripe to handle the long road to monetary normalization, BBVA Compass economists say in their latest report.  

"Federal Open Market Committee members unanimously agreed that this was an appropriate time to raise the federal funds rate," writes BBVA Compass Senior Economist Kim Chase. "The Fed has overcome a huge obstacle with this first rate hike, but now they need to deal with the reaction and hope that the economy continues to move along in line with their outlook."

The report notes that positive economic indicators — among them an improved labor market, with a 5 percent unemployment rate and pickup in wage growth — overrode concerns about global volatility and low inflation, leading all Federal Open Market Committee members to vote in favor of a liftoff.

U.S. Federal Reserve Chair Janet Yellen was quick to emphasize any future hikes would be gradual as policymakers allow short-term volatility to settle and are able to assess the actual impact of the first rate hike. To have a better idea of what exactly FOMC members will be looking out for, a review of the minutes from Wednesday's meeting will be necessary, Chase writes. The minutes are expected to be released in early January, 2016.

"As long as their outlook remains intact, the Fed can continue along with their data-dependent strategy and take additional, albeit gradual steps toward future interest rate hikes, with only two more rate increases to close out 2016 at 1.0%," said Chase.