Fed in first hike in nearly a decade

December 16, 2015, 7:41pm


US Federal Reserve chairwoman Janet Yellen. Picture: BLOOMBERG/ANDREW HARRER  

Reuters on Business Day Live

THE Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the US economy had largely overcome the wounds of the 2007-09 financial crisis.

US stocks maintained gains while the rate on two-year Treasury yields briefly topped 1%.

The US central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25% and 0.50%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

"The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2% objective," the Fed said in its policy statement, which was adopted unanimously.

The Fed made clear that the rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.

"In light of the current shortfall of inflation from 2%, the committee will carefully monitor actual and expected progress toward its inflation goal. The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate," the Fed said.

New economic projections from Fed policy makers were largely unchanged from September, with unemployment anticipated to fall to 4.7% next year and economic growth at 2.4%. The statement and its promise of a gradual path represents a compromise between those who have been ready to raise rates for months and those who feel the economy is still at risk.

The median projected target interest rate for 2016 remained 1.375%, implying four quarter-point rate hikes next year.

To edge that rate from its current near-zero level to between 0.25% and 0.50%, the Fed said it would set the interest it pays banks on excess reserves at 0.50%, and said it would offer up to $2 trillion in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher.

Financial markets had expected the rate hike, bolstered by recent US data showing job growth continuing at a strong pace.

The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising US rates sets in.

The impact on business and household borrowing costs is unclear. One of the issues policy makers will watch closely in coming days is how long-term mortgage rates, consumer loans and other forms of credit react to a rate hike meant not to slow an economic recovery but nurse monetary policy back to a more normal footing.

The Fed emphasised it would move slowly into its tightening cycle. That was enough to produce a unanimous vote on the policy-setting Federal Open Market Committee, as even members who had argued publicly for delaying a rate hike delay went along with Fed chairwoman Janet Yellen and other policy makers.

Reuters