The Federal Reserve concluded its meeting this past Wednesday, choosing to increase their interest rate target by a quarter of a percentage point. The move was expected by the market because the Fed had been signaling it was planning on raising rates before the end of the year. Many market participants are cheering the move, saying it shows the Fed has confidence in the economic recovery and that things will be returning to normal. However, this is quite unlikely for a number of reasons that will be discussed below.

First the facts. The Federal Reserve increased the federal funds range from 0% to 0.25% (where it had been since December of 2008), to a higher range of 0.25% to 0.50%: essentially a quarter point increase. Yellen noted that the rate increase was due to the Fed’s confidence in the U.S. economy. The Fed’s projections put interest rates at a median 1.375% by the end of 2016, implying gradual rate hikes through next year.

I previously wrote that I did not expect the Fed to raise rates this year. So yes, I was off in this prediction since the Fed did sneak in a small increase right before year end! My logic was that the Fed currently had more to lose than to gain with a rate increase, given the risk of increasing rates into a recession or pricking the stock and bond bubbles. Conversely, the Fed didn’t face much pressure to increase rates, given that inflation is currently low, and if inflation did increase, it could be blamed on other factors.

I still think that is the case, which is why the Fed’s first increase is a very small one. What may have prompted the increase could be two factors. First, since the Fed has talked about (and repeatedly delayed) increases, they may have felt it necessary to finally have one, lest they lose all credibility. It was getting to the point that the market expected it so much, that if they backed out, it could have signaled that the Fed was not at all confident in the U.S. recovery, which might have sent panic through the economy.

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