Banks cheer Fed’s interest rate increase

The central bank will raise short-term rates from the 0.0%-to-0.25% range to between 0.25% and 0.50%.

The rate hike will affect consumers on numerous fronts, ranging from interest rates on credit cards and mortgages to the returns on investments and savings accounts, but experts say the impacts will be modest to begin with.

The US Federal Reserve has raised interest rates for the first time since 2006, ending measures brought in after the global financial crisis in 2007.

“Just like how the quantitative easing tapering news was more potent than the actual tapering, markets will self-adjust once the rate hike is announced as this news gets factored in”, said Madan Sabnavis of Care Ratings.

While Fed officials want to move slowly, an acceleration in inflation could force them to raise rates more quickly. The median prediction on unemployment shows the Fed expects the rate to continue falling, to 4.7 percent next year, from this year’s five percent.

Today’s rate hike “marks the end of an extraordinary seven year period”, Fed Chair Janet Yellen said, adding that the world experienced the “worst financial crisis and recession since the Great Depression”.

Yellen also soothed concerns about higher rates by repeatedly telling investors that the Fed will be “gradual” about future rate increases so as not to kill the economic recovery.

“We’ve anxious about the fact that with interest rates at zero, we have less scope to respond to negative shocks”, she said at her news conference.

The increase means taking out loans will cost you a little bit more but it also means federal regulators are feeling confident about the economy. Compared to its last forecast in September, the Fed raised its expectations for growth next year to 2.4%, up from 2.3%.

The Fed made clear this was a tentative start to a “gradual” tightening cycle and that in deciding its next move it would put a premium on monitoring inflation, which is mired below target.

On Wednesday, the Fed’s committee improved its economic outlook.

There were no dissents, even though multiple committee members publicly over the past few months have expressed reservations about rate hikes. “In the past, the Fed has used changes in reserve supply to try to increase the rate banks pay when they borrow reserves from other banks”. So, what’s next? When’s the next interest rate hike?