The Fed also mentioned that this rate hike was the beginning of a gradual tightening cycle and that it would continue to monitor inflation, which remains below target.
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The Fed raised its benchmark federal funds rate, locked near zero since the 2008 financial crisis, by a quarter point to 0.25-0.50 per cent, saying the United States economy is growing solidly and should accelerate next year to a respectable 2.4 per cent pace.
The Federal Reserve System, the central banking system of the United States of America, on 16 December 2015 increased interest rate by 0.25 percent. She said the Fed went ahead with its rate hike despite low inflation because its policies operate on a lag.
More importantly, the inflation is expected to rise to 2 percent over the medium term which is and indication of growing demand in the market.
“With the Dow rising steadily from the moment [Fed chairwoman Janet Yellen] first opened her mouth, the rosy picture she painted of the U.S. economy and the absence of major overseas threats has sent markets surging with relief”, said Robert Craig, private client investment manager at MB Capital.
The decision is easing fears that the Fed was trapped at near-zero rates and would never be able to lift them without causing economic and financial chaos.
The rate increase apparently is being seen as a sign of confidence in the US economy by many in Asia, where stock markets surged on Thursday. “What that means is that for any given monetary policy, interest rates are still going to be lower than they would have been 10 or 15 years ago”.
“The direct effect on US GDP growth is generally larger, but offset to some extent by the rise in the dollar so the overall effect on exports and global GDP growth rates outside the US will be small but observable”.
The metal had rallied before the Fed decision on Wednesday and ended the day up 1.2 percent, before retreating on Thursday.
What got raised was the Fed funds rate which determines how much banks charge when they lend to each other.
But the rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes pencilled in for next year and a terminal rate of 3.5 per cent.
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Kreuzkamp added that the real test for the Federal Reserve will come in 2016 and that, due to the sluggish speed of economic growth, it’s not obvious when the next rate hike will come.
