The move initiates what will be a series of slow rate increases which the Federal Open Market Committee, the Fed’s policy board, promised would be “gradual” and follow the pace of the economy.
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On Wednesday, the Fed raised its key interest rate from a range of 0% to 0.25% to a range of 0.25% to 0.5%.
The US central bank has said it is likely to proceed gradually in normalising the interest rates, although future policy actions will depend on how the economy evolves relative to its objectives of maximum employment and two per cent inflation.
BOJ Gov. Haruhiko Kuroda has said the central bank’s 2 percent inflation target is achievable, but recent BOJ data show lower oil prices have made Japanese companies cautious about the outlook.
“The Fed’s decision today reflects our confidence in the US economy”, Chair Janet Yellen said at a news conference. The Fed sees inflation inching up in the years to come, but not hitting 2 percent until 2018. She emphasized that interest rates remained low even after the rate hike, near levels economists regard as appropriate for a recession.
“This commodity has been a victim to heavy depreciations from the rising optimism around a December US rate rise, and now this has become a reality, any hope for a recovery in prices before the end of the year has promptly faded”, he added. Trader, Tom Tagtmeyer says this move was positively received by the markets, however changes are coming. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 percent, for the day.
Fed policymakers are doing all they can to ensure that rates, which have been at rock bottom for seven years, will actually rise on Thursday despite some $2.6tn (£1.74tn) in excess bank reserves flooding financial markets.
Consumers will be paying slightly more interest on credit cards and home equity lines. This is the first increase since 2006 and since 2008 the rate has been around 0%.
If past rate hikes are any guide, the odds are the job market will continue to improve and the financial markets will take the hike in stride.
Some analysts expect the Fed to raise rates at every other meeting in 2016, for a total of four quarter-point moves.
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Earlier, Bloomberg Business reported that the Fed’s decision to raise rates after spending the better part of the decade near 0% could have a negative impact on utility stocks, which investors bought up for their predictable returns and dividends.
