The Federal Reserve hiked interest rates for the
first time in nearly a decade on Wednesday, signaling faith that the U.S. economy
had largely overcome the wounds of the 2007-2009 financial crisis.
The U.S. 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 percent and 0.50 percent, ending a lengthy debate about
whether the economy was strong enough to withstand higher borrowing costs.
"With the economy performing well and
expected to continue to do so, the committee judges that a modest increase in
the federal funds rate is appropriate," Fed Chair Janet Yellen said in a
press conference after the rate decision was announced. "The economic
recovery has clearly come a long way."
The Fed's policy statement noted the
"considerable improvement" in the U.S. labor market, where the
unemployment rate has fallen to 5 percent, and said policymakers are
"reasonably confident" inflation will rise over the medium term to
the Fed's 2 percent objective.
The central bank made clear 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.
"The process is likely to proceed
gradually," Yellen said, a hint that further hikes will be slow in coming.
She added that policymakers were hoping for a
slow rise in rates but one that will keep the Fed ahead of the curve as the
economic recovery continues. "To keep the economy moving along the growth
path it is on ... we would like to avoid a situation where we have left so much
(monetary) accommodation in place for so long we have to tighten
abruptly."
New economic projections from Fed policymakers
were largely unchanged from September, with unemployment anticipated to fall to
4.7 percent next year and economic growth hitting 2.4 percent.
The Fed statement and its promise of a gradual
path represented a compromise between policymakers who have been ready to raise
rates for months and those who feel the economy is still at risk from weak
inflation and slow global growth.
"The Fed is going out of its way to assure
markets that, by embarking on a 'gradual' path, this will not be your
traditional interest rate cycle," said Mohamed El-Erian, chief economic
advisor at Allianz.
Fed officials said they were confident the
situation was ripe for them to make a historic turn in policy without much
disruption to financial markets, which had expected the hike this week.
U.S. stocks rallied on the news, in part because
the Fed made clear it would proceed slowly with further tightening. Yields on
U.S. Treasuries rose, while the dollar was largely unchanged against a basket
of currencies. Oil prices fell sharply before paring losses.
POLICY STILL ACCOMMODATIVE
Yellen on Wednesday said the Fed had no desire
to curb consumers from spending or businesses from investing. She emphasized
that interest rates remained low even after the rate hike, near levels
economists regard as appropriate for a recession.
"Policy remains accommodative," Yellen
said. "The U.S. economy has shown considerable strength. Domestic spending
has continued to hold up."
Fed policymakers' median projected target
interest rate for 2016 remained 1.375 percent, implying four quarter-point
hikes next year. Based on short-term interest rate futures markets, traders
expect the next rate hike in April.
A Dec. 9 Reuters poll showed economists
forecasting the federal funds rate to be 1.0 percent to 1.25 percent by the end
of 2016 and 2.25 percent by the end of 2017.
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 U.S. rates sets
in.
To edge the target rate from its current
near-zero level to between 0.25 percent and 0.50 percent, the Fed said it would
set the interest it pays banks on excess reserves at 0.50 percent, and would
offer up to $2 trillion in reverse repurchase agreements, an aggressive figure
that shows its resolve to pull rates higher.
The impact on business and household borrowing
costs is unclear. One of the issues policymakers will watch closely in coming
days is how long-term mortgage rates, consumer loans and other forms of credit
react to the rate hike.
(Additional reporting by Lindsay Dunsmuir and David Chance in Washington, Ann Saphir in San Francisco and Jonathan Spicer and David Gaffen in New York; Editing by Paul Simao)
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