WASHINGTON (Reuters) - The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signalling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.
The U.S. central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.
In accordance with my earlier posts on this topic, how will they do it?
To edge that rate from its current near-zero level to between 0.25 percent and 0.50 percent, the Fed said it would set the interest it pays banks on excess reserves at 0.50 percent, and said it would offer up to $2 trillion in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher.
These are the two tools that I have concluded are the only tools available to the Fed for raising rates, given the level of excess reserves. I earlier posted an analysis that suggested that up to $800 million in reverse repos would have to be offered to move rates 0.25%. $2 trillion? They aren’t fooling around.
They also have never done anything like this. What will it mean for liquidity?
This should be interesting.