Federal Reserve Raises Interest Rate After Seven Years of Near-Zero Rates

“Rising U.S. interest rates will have a neutral effect on most U.S. companies, which can afford the increase”, Moody’s said. The Fed’s move initially sent the dollar slightly lower and gold prices held their gains. If the U.S. labour market was close to full-employment there should have been a fairly rapid rise in wage growth, which hasn’t happened. “I look at today’s American economy and I say this is not a moment to be hitting the brakes even gently” he argued.

The decision to hike rates was contingent on whether improvement had been made toward the central bank’s two objectives, maximum employment and price stability, or inflation approaching its two percent objective. But the yellow metal was looking at a weekly drop of about 1% on selling pressure sparked by the Fed decision, according to FactSet data.

The long-anticipated though modest increase in the federal funds rate boosted the dollar to a fresh two-week high against a basket of major currencies.

To ensure they rise as much as desired, the Fed effectively ditched a cap on the so-called overnight reverse repurchase program, or ON RRP, saying on Wednesday it would use as many of its Treasury bonds as needed for the daily auctions.

Before Wednesday’s announcement, in testing the program, the Fed limited itself to $300 billion of daily borrowings through reverse repos. My Dartmouth colleague Andrew Levin, who was an adviser toJanet Yellen and Ben Bernanke, has suggested, and I agree, at this juncture it is imperative for the Fed to reframe its policy strategy and shore up the credibility of its inflation target.

The Fed’s 30-minute repo auction attracted only muted interest because higher returns were available elsewhere in the broader $5-trillion repo market. In August the central bank had already announced a “roadmap” describing the measures it would take should the Fed decide to increase its interest rate. China’s Shanghai Composite gained 1.4 percent to 3,563.21.

“One shouldn’t lose sight of the fact that the FOMC didn’t raise rates on Wednesday so much out of economic growth necessity as it did for its own peace of mind”, said Patrick O’Hare at Briefing.com.

“Gold remains heavily bearish and bears have been gifted an opportunity to install another round of selling momentum throughout metals before the end of the year”. Higher rates mean they can charge more for lending.

“It could be well into January before the Fed gets the daily amount of the RRP program perfectly calibrated”, said Carl Tannenbaum, chief economist at Northern Trust and a former Chicago Fed official. What’s more noteworthy was that the Fed did not move an inch from the ‘gradual’ rate hike trajectory.

In a wide-ranging, hour-long interview at the San Francisco Fed’s headquarters, Williams said he expects easy Fed monetary policy to help push the unemployment rate, now at 5 percent, down to around 4.5 percent by the end of next year.

“You might immediately jump to the conclusion that it’s every other meeting”, Williams said, referring to the likely timing of next year’s rate increases.