The US Federal Reserve last night hiked interest rates by 0.25 per cent. This is the first hike in about a decade, signaling a recovery in the US economy.
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The jubilant mood was helped as comments from Fed chairwoman Janet Yellen suggested the path of future rate rises in the world’s biggest economy would be slow and gradual.
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After holding its benchmark rate near zero in a crisis stance since December 2008, the Fed increased the rate by a quarter-point to 0.25-0.50 percent on Wednesday and projected as much as another 1.0 percentage point climb over the next year.
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The decision “recognizes the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardships that have been endured by millions of ordinary Americans”, Ms. Yellen said. The central bank has said its target inflation rate is 2 percent.
“It’s what the Fed does next that the market will be focused on, and that largely depends on economic and financial market developments”, Jordan Eliseo, chief economist at trader Australian Bullion Company in Sydney, said by e-mail.
After months, weeks and days of speculation and guess work, the US Federal Reserve has finally raised interest rates – by 0.25%.
Stocks in Australia, Tokyo and Hong Kong were all up, and the dollar rose slightly against the euro.
Though all 10 voters on the Fed’s policy setting committee supported the initial hike, two registered a quiet protest of sorts by indicating in their forecasts that they felt the “appropriate” rate for the end of 2015 remained near zero.
There was a lot of anxiety from investors ahead of the central bank rate announcement after the European Central Bank (ECB) had failed to communicate its intentions to the market.
Reserve Bank of India Gov. Raghuram Rajan said the central bank would supply liquidity as needed.
Interest rates are dragging along the floor and have forced investors and savers to desert their prudent ways and seek riskier investments in a frantic search for yield.
“The pace and extent of future rate increases is likely to be data-dependent, and it is plausible that the Fed will be cautious about hiking further in the next few months”.
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, told Reuters: “With the Fed out of the way and only a couple of trading sessions left before Christmas, we could now see a traditional year-end rally”. The yield on two-year Treasuries, closely tied to short-term interest rates, closed above 1 percent for the first time since April 2010.
The Federal Reserve, or Fed, also released its expectation for some important economic numbers.
New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 percent next year and economic growth hitting 2.4 percent.
Most officials predicted the Fed would once again miss its 2 percent inflation target next year. Their median estimate for the longer-term federal funds rate stayed unchanged at 3.5%.
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The impact on business and household borrowing costs is unclear. “While the USA economy is certainly moving in the right direction the recovery remains tepid, and yesterday’s inflation figure of just 0.5 per cent gives the Fed plenty of room to leave rates lower for longer”. Instead, beginning Thursday morning, the Fed planned to pay banks and other financial firms not to lend below its new benchmark rate.
