The Fed Raises Key Rate for First Time in almost a Decade

And Wednesday’s rate hike was exactly in line with market expectations, the FOMC having been “very transparent in what they do and very aware in where inflation is and what markets have done”, NEPC’s Smith said. But the market actually closed higher following the Fed announcement, so the jury is out for now. Stocks in the US rallied, with the S&P 500 and Nasdaq both rising 1.5%, while the Dow gained 224 points.

The bond market didn’t react much. For example, the Fed’s inflation target of 2 per cent is not a ceiling that inflation can not surpass. Thus they represent only a general indication of the rate trend. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys. The increase is the first in nine years: The Federal Reserve’s last hike was June 29, 2006.

However, banks and investors should understand that higher interest rates will not necessarily translate to fast and bigger margins or profits, said Jim Coburn of Coburn and Associates. And the Fed’s first hike may not slow them. But it is hard to see how the increase will benefit the economy as a whole. And all others but two said it would happen in the second quarter.

“Indeed, conditions may worsen, particularly if these economies feel that their only response to the growing pressures in their domestic economies is to intentionally depreciate their currencies even further”.

Chairwoman Janet Yellen said the unanimous decision meant the committee was confident on the current strength of the U.S. economy but future rises would be steady and dependent on economic figures.

Since 2009, the Fed has kept rates close to zero, in an effort to stimulate the economy after the Great Recession. And something of a letdown after all the buildup in recent times about the looming end of the near-zero interest rate policy that has been in place since 2008.

When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy. The median projected federal funds rate for 2016 remains at 1.4%, suggesting four rate hikes next year, each by 0.25%. It cited “considerable improvement” in the job market.

But by 2017, he said, inflation should be on its way back to the Fed’s 2-percent goal.

In early Friday trading, the fed funds rate was quoted at 0.36 percent to 0.38 percent, compared with 0.35 percent late on Thursday, according to ICAP data.

Japan’s Nikkei 225 fell 0.1 percent, with the Bank of Japan expected to maintain its economic stimulus program at its Thursday meeting.