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December 2016


Fed policymakers say future increases in the federal funds rate will be gradual. But what do they mean? Will the pace be too slow, too fast or just right?

Interest Rate Increases: How Fast is Gradual?

Chair Yellen talks with the media following the December 2016 FOMC meeting.

On the face of it, the end of 2016 looked a lot like the end of 2015 when it comes to monetary policy.

In its December meeting of both years, the Federal Open Market Committee undertook the year’s only increase in its target range for the federal funds rate. Each time, the Committee’s statement also suggested future increases would likely be “gradual.”

Should we conclude that “gradual” means once a year? Maybe not.

The prospect of an interest rate liftoff — after six years at the floor — was building throughout 2015. When Fed policymakers finally raised rates, the use of “gradualist” language was meant to reassure the public that there would not be an abrupt change in policy. At the time, the economic projections of FOMC participants foretold of four more rate increases in 2016, an indication of what they thought “gradual” meant.

But beginning early in 2016, a series of global developments created enough market and economic uncertainty to delay the Committee’s rate increases. Sources of concern included events in China, the United Kingdom’s so-called Brexit vote and uncertainties involving the outcome of the U.S. presidential election.

By December, though, it was clear that such disruptions had not set the economy off its course. Employment growth continued at a healthy pace, while measures of inflation moved up toward the Committee’s 2 percent goal as had been expected.

With the December 2016 rate increase, the gradualist language is paired with a forecast of three increases in 2017. Will this be too slow, too fast or just right? We’ll look for clues when Fed policymakers meet on January 31.

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