Rates hike for US Federal Reserve

The bank is now more anxious about financial market stability than adding more jobs and fattening paychecks, University of OR economist Tim Duy argues.

Fed Chair Janet Yellen emphasized Wednesday’s move was “pre-emptive” as it came despite low inflation.

“The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook”, James Marple, senior economist at TD Economics wrote in a research note.

The Fed said it saw its benchmark rate rising further to about 1.4 percent by the end of 2016. 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. The last rate hike was June 2006. “It reflects the committee’s confidence that the economy will continue to strengthen”.

“Now the conversation is yes, the Fed believes that the economy is strong enough that it doesn’t need zero percent interest”, Smith said.

The one-fourth of a point rise signals continued economic recovery since the downturn in 2008. Remember, the oil boom was fuelled partially by Fed’s loose money policy.

But, in a small surprise, the FOMC support for the rate decision was unanimous, and the committee’s statement pointed to “considerable” improvement in the past year in the labor market, and said it is “reasonably confident that inflation will rise, over the medium term, to its two percent objective”.

But inflation has remained well below the Fed’s 2 percent target, a level considered necessary to encourage healthy spending levels. “Recognising that even after this increase, monetary policy remains accommodative”, Ms. Yellen said.

How is the market reacting?

Stocks closed up sharply higher. The S&P 500 stock market index gained 1.5% on Wednesday – up back into positive territory.

“At a time when real unemployment is almost 10% and youth unemployment is off the charts, we need to do everything possible to create millions of good-paying jobs and raise the wages of the American people”, Sanders said in a statement.

“The Fed will be absolutely delighted with the lack of volatility across all asset classes. That’s exactly what savers should do”, McBride says.

“Consumers might find that the rates that they have for mortgages, for cars, for credit cards might be going up”, Smith said. That, in turn, affects the interest rates they give out to customers.

Hong Kong’s top central banker, who was obliged to immediately match the Fed’s hike under the Chinese-run city’s peg to the USA dollar, said he expected only a modest outflow of capital as a result of the Fed’s move. The Fed now pays interest on reserves, it is in line with the operating practices of the other major central banks, and those banks have no problems whatsoever of setting the overnight rate independently of the size of their balance sheet. The prime rate is a benchmark for many types of consumer loans such as home equity loans.