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US Federal Reserve raised interest rate to 0.5 percent

Asian and European stock markets have shown healthy gains in reaction to the US Federal Reserve’s first interest rate increase in nearly a decade.

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The widely expected rate hike, though small, is seen as a sign of how much the USA economy has healed since the 2007-08 financial crisis.

“Although an increase in United States interest rates may be justified for the U.S. economy, it is far from ideal for the rest of the world”, it said.

The Fed put interest rates near zero during the financial crisis in December 2008 to help stimulate the economy and boost the collapsed housing market. Compared to its last forecast in September, the Fed raised its expectations for economic growth next year to 2.4 percent from 2.3 percent.

ANZ research expects the next hike to come in the second quarter of 2016 and from then on is forecasting a more gradual tightening cycle than the Fed (although steeper than the general market). “The Fed has been talking about a rate hike ever since ending quantitative easing over a year ago”, Dr Oliver said. Right now, the Fed’s preferred price gauge is up a scant 0.2 percent over the past 12 months.

In response, the dollar clocked up advances against most other currencies.

It announced that any further rate hikes will be gradual and will depend on further progress towards the inflation goal.

Federal Reserve chair Janet Yellen said policy makers chose to increase the rate as the US economy expands “at a moderate pace”.

The prospect of higher Fed rates is seen as negative for emerging markets because one of their main appeals is that they pay relatively higher interest rates than assets in developed economies.

To the surprise of very few observers of the Federal Reserve, the central bank raised the target for its federal funds rate a quarter of one percent on Wednesday, in line with what it had been telegraphing. Most market participants do not expect another rise until April, according to CME Group FedWatch. “Companies may face higher refinancing costs, while the man on the street may face rising mortgage rates but, on the flip side, rising deposit rates and yields will benefit savers and investors”.

The increase marks the end of seven years of extraordinary measures and near-zero rates since the recession began.

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“Gold has been extraordinarily sensitive to perceived changes in monetary policy for many months”, HSBC said in a note.

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