Federal Reserve Raises Interest Rate After Seven Years of Near-Zero Rates

It means a higher cost of borrowing for everyone from foreign governments and companies to home and auto buyers, while also better rewarding savers on their bank accounts. When the USA dollar is falling, investors tend to look for alternative sources like gold, but the opposite can be true.

But the economy is now a lot healthier with unemployment at 5 percent, half of the 10 percent rate it hit in 2009 during the worst of the jobs crisis.

“With the Dow rising steadily from the moment [Fed chairwoman Janet Yellen] first opened her mouth, the rosy picture she painted of the USA 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 central bank believes the us economy is strong now and no longer needs crutches and that the move “marks the end of an extraordinary period” of low rates created to boost the recovery from the Great Recession. Yellen repeatedly said during the press conference that future rate hikes will be “gradual”.

“The hints of further rate hikes moved the dollar because the market had priced in 2-3 more rate hikes in 2016”, Citi strategist David Wilson said. The metal had rallied before the Fed decision on Wednesday and managed to hold most of those gains after the central bank statement, ending the day up 1.2 per cent.

The decision to hike rates was contingent on whether improvement had been made toward the central bank’s two objectives, maximum employment and price stability, or inflation approaching its two percent objective.

The global headwinds stemming from difficulties in emerging economies such as China, Russia and Brazil could further suppress inflation and hurt hiring, possibilities that the Fed might struggle to model. The jobless rate is now at a seven-year low of five per cent, close to the Fed’s target for full employment.

Knight, however, said if the rate rises continue and become larger, the downside impact in advanced economies will be more serious.

The hike would also see United States and European monetary policy move in opposite directions.

Baker described the rate hike as a move in the “wrong direction”, arguing it didn’t appear justified by employment, wage and inflation data.