US Federal Reserve hikes interest rates for first time in nine years but stresses future hikes will be gradual

Chris Papadopoullos
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Yellen has lifted US interest rates for the first time since 2006 (Source: Getty)

The US central bank has raised interest rates for the first time since 2006.

The Federal Reserve lifted its main policy rates 0.25 percentage points, its first hike in nine years and its first interest rate change since 2008. The target range for the federal funds rate is now 0.25 to 0.5 per cent.

The dot plots, which show where each member of the federal open market committee (FOMC) thinks rates will be at the end of each year, implied a more gradual pace of rate hikes than in September. Only one FOMC member said they thought the middle of the target range would be above two per cent by the end of 2016, down from four in September.

The statement from the Federal Reserve said:

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.

Signalling that rates would stay lower for longer, it added:

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

The FOMC voted unanimously for the hike.

Federal Reserve chair Janet Yellen said the rise "marks the end of an extraordinary period" and "reflects the committee's confidence that the economy will continue to strengthen".

Yet she also said: "the recovery has come along way but is not yet complete...even after this increase, the fomc is likely to proceed gradually."

"Future actions will depend on how data evolves."

The move in interest rates was telegraphed in advance with Yellen saying two weeks ago that a December rate hike was on the cards provided there no surprises in economic data.

A fresh low for oil prices was not enough to put off the central bank – the US benchmark West Texas Intermediate fell below $35 a barrel this week for the first time since February 2009.

US inflation is currently hovering around the zero mark, well below the Federal Reserve’s two per cent target, but it expects it rise quickly this year as the effect of low oil prices wears off.

The jobs market has also improved this year with the unemployment rate steadily declining to five per cent this year, taking the jobless rate near to pre-recession levels.

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