The US central bank finally hiked interest rates for the first time since 2006 last night in a highly-anticipated move marking “the end of an extraordinary period.”
US stock markets welcomed the move, with the S&P 500 jumping 1.45 per cent as the Federal Reserve lifted its main policy rate 0.25 percentage points from record lows.
“The market got what it wanted,” Joe Saluzzi, co-founder of Themis Trading, a US brokerage told City A.M. last night.
The range for its main policy rate is now 0.25 to 0.5 per cent.
Federal Reserve chair Janet Yellen successfully made the leap – and survived an hour-long press conference – without stoking global investor volatility. The hike effectively draws a line under the global financial crisis and the slow US economic recovery from it, with Yellen saying the move “reflects the committee’s confidence that the economy will continue to strengthen”.
The 12 rate-setters, who voted unanimously for the hike, were keen to stress they are expecting rates to rise gradually in future. Only one of them said they thought the middle of the target range would be above two per cent by the end of 2016, whereas four committee members held this view in September.
The statement from the Federal Reserve said: “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 two per cent objective.”
But erring on the side of caution it said it expects “economic conditions will evolve in a manner that will warrant only gradually increases.”
Yellen remained cautious: “The recovery has come a long way but is not yet complete... even after this increase, the Federal Reserve is likely to proceed gradually.”
Economists and analysts welcomed the hike.
“Given the strength of the economy, to continue to have the interest rate at what is an extraordinary crisis level, which had really never occurred before, it’s well overdue,” Charles Goodhart, a former UK rate-setter, told City A.M.
Experts also heaped praise on the Federal Reserve’s communication, which kept markets calm after the historic decision.
“Given the fact she telegraphed it so well, it has kept the markets on an even keel,” Brenda Kelly, head analyst at London Capital Group said. Saluzzi added: “Everyone’s thrilled to get off near-zero interest rates.”
However, he noted that many US bank shares jumped after a number of institutions said they would increase the rates they charge on loans, but keep the rates they pay on deposits the same.