What's going on?

The US Federal Reserve (�the Fed�) raised its target interest rate for the third time in six months on Wednesday, shrugging off concerns that its actions could hurt an economy that has faltered in recent months.

What does this mean?

The Fed was widely expected to raise its target interest rate � so that was no surprise. More interestingly, it gave no signals that recent signs of economic weakness would derail plans to raise its interest rate again later this year. Remember, higher interest rates make it tougher for the economy to grow by making it more expensive to borrow, and thus spend, money � as such the Fed likes to raise rates only when it thinks the economy is strong enough to withstand it.


In addition to this, the Fed also signaled that it would begin to sell bonds on the open market later this year (i.e. the opposite of the Fed�s former policy of quantitative easing). By selling bonds, the Fed would be, effectively, increasing interest rates in a different way in the future (click here for more background).

Why should I care?

For markets: Markets were cautious but calm.

On the surface, the news isn�t good for stocks: the economy may be weakening and the Fed is going to continue paring back its support. And yet the market�s reaction was sanguine: stocks finished the day only moderately lower. Investors may think that if things truly got bad then the Fed would stop withdrawing its support and the Fed�s current policies, which are still very supportive by historical standards, would remain beneficial for stocks.


The bigger picture: It�s a positive message � if the Fed is correct.

The Fed is, essentially, saying that it thinks the recent soft economic data is temporary. If it�s correct, that�s great: the economy, after eight years of expanding, would continue to strengthen! The problem will come if the Fed is wrong, and the situation really is weakening. We�ll just have to keep paying attention to the data in order to find out�