US Fed hikes interest rates for first time since 2006

It’s a graph showing where the various members of the Federal Open Market Committee, or FOMC, think interest rates will be at the end of a given year. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 percent, for the day.

The Fed kept a lid on interest rates, which have remained astonishingly low by historical standards. Our most recent forecast expected rates to end 2015 at 4.15%, so we’re right in line with our most recent forecast.

However, the bank’s boss Janet Yellen said she had been surprised by “the further downward movement in oil prices” and expected them to stabilise before edging up.

On Wednesday, the Fed raised its key interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent.

Minutes of the Bank’s rates meeting this month confirmed this view, stating that the rate-setting committee believed there was “no mechanical” link between United Kingdom monetary policy and that of other central banks. The Fed’s rate hike was the first in almost a decade, and the first move in policy since it lowered rates to the zero-bound range during the financial crisis.

The interest rate hike by the Fed could help energize banks’ profits because the interest rates of many floating rate consumer loans, credit cards and other instruments are tied to the prime rate. The Standard & Poor’s 500 index added 29.66 points, or 1.5 percent, to 2,073.07.

Inflation, a bit too high in June 2006, is now disturbingly low – up just 0.2 percent in the year to October, nowhere near the Fed’s 2 percent target. And the Fed’s first hike may not slow them.

“She has managed to pull it all together”, said Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ Ltd.in NY. If rates stayed at near zero, the Fed might not have the tools to combat a recession. Central banks in the eurozone, northern Europe, Australia and South Korea all had hiked rates already.

“We mustn’t wait until all the danger lights are flashing before we make these first rises in interest rates, because then we’re going to have to raise interest rates quite rapidly, and that’s really what the MPC wants to avoid”.

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 per cent next year and economic growth hitting 2.4 per cent. Should the economy stumble, the Fed could postpone further rate increases. It cited “considerable improvement” in the job market. It raised the rate it pays on a type of short-term loan to 0.25 percent from 0.05 percent. But the Fed’s action will probably have little effect on rates for homes, cars or college debt, at least in the short run.

The increase is a major turning point for the U.S. – signalling that the American economy is back on track after financial turmoil.