The Fed put rates near zero in December 2008 to boost the economy and stimulate the collapsed housing market.
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But the Federal Reserve last night raised its key interest rate by 0.25pc, ending seven years of near-zero rates.
Gold has slumped almost 10 per cent this year, largely on uncertainty around the timing of the rate rise and on fears that higher rates would hit demand for the non-interest-paying metal.
She said, “The Fed’s decision today reflects our confidence in the USA economy”. And they forecast the rate will be 2.38 per cent at the end of 2017 and 3.25 per cent at the end of 2018, both a quarter-point lower than in September.
It announced that any further rate hikes will be gradual and will depend on further progress towards the inflation goal. The fed expects its federal funds rate to reach between 2 percent and 4 percent by 2018.
Stocks closed up sharply higher.
On Wall Street, the Dow Jones went from a 50-point rise to stand up 79 points, and later added to that to close up 224 points at 17,749, a 1.3% gain.
The bond market didn’t react much.
Knight, however, said if the rate rises continue and become larger, the downside impact in advanced economies will be more serious.
Hence, to consolidate the ongoing recovery process of the economy, the Fed chose to increase the interest rate. The prime rate is a benchmark for some types of consumer loans such as home equity loans.
By comparison Australia’s cash rate is at record low two per cent. The first time its done so in nine years. And competition for buyers will spur them to take other steps to hold down rates, such as accepting lower profits.
Markets both in USA and Asia rallied over the “dovish” language used by the Fed to describe future rate hikes. But nervous investors have been looking for further assurances.
Higher interest rates tend to make precious metals that don’t bear interest rates attractive for investors.
That followed a strong session overnight for U.S. and Asian markets following the interest rate decision. However, she added that there was still room for improvement in the jobs market while inflation was still below target.
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However, inflation now still stands below the bank’s 2 per cent target, and a statement from the Federal Reserve acknowledged the drag from declines in energy prices and in inflation expectations.
