Economists see next Fed rate increase in first quarter of 2016

Three rounds of quantitative easing, or asset purchases, by the Fed shifted the global flow of money while USA interest rates remained near zero for seven years.

Does this mean the end of accommodative policy? In its most recent projections, the Fed lowered its expectation for 2016 core inflation growth to 1.6 per cent, down from its previous 1.7 per cent expectation.

But the decision to hike the cost of borrowing in the USA comes at a time when the global economy and China’s growth have been slowing. Many participants in the FOMC meeting also forecast that next year’s interest rates would range from 1-1.5 percent, according to the report. Ever since, however, the rate of economic growth has been modest, at around 2%, making the Fed skittish about “normalizing monetary policy”. Chairwoman Janet Yellen said further hikes would be gradual, signaling four quarter-point increases in 2016. “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.

Yellen’s confident and measured performance – she even managed a joke about the Fed’s forecasting record – came as she ended the “extraordinary” measures that revived the US economy from the worst recession since the 1930s.

“For Britain, higher USA interest rates give the Bank of England the flexibility to start normalising rates on this side of the Atlantic as well”. Investors have sent gold down 10 percent this year in anticipation of higher rates and the dollar strength.

KAREN BLEIER/AFP/Getty Images The U.S. Federal Reserve building in Washington, D.C.

“There will always be a thousand possible excuses not to raise rates, but we must take account of the exceptional circumstances in which we find ourselves”.

The benchmark rate affects terms for everything from consumer and business loans to credit card rates, but the Fed stressed future increases would be “gradual”. “It reflects our confidence that the economy will continue to strengthen”.

Markets had ample warning that this was coming to prepare, and interest rates in many cases had already risen.

Rates on mortgages and auto loans aren’t expected to rise much soon. They included Wells Fargo & Co, JPMorgan Chase & Co and Bank of America Corp and raised prime rates to 3.5 percent from 3.25 percent, Reuters reported. That has removed some of the uncertainty that investors dislike.

Prime Minister Justin Trudeau, speaking in advance of the announcement, said it was a good sign that the American economy was seeing a resurgence, but promised to examine the challenges that a lower dollar poses for the Canadian economy. The Fed strongly believes that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.

The rise is significant for those in the USA, but is also likely to have an impact in countries around the world, including the UK.