Fed raises interest rate for first time in nearly a decade
By Paul Handley
3 hours ago
Washington (AFP) - The
Federal Reserve announced Wednesday its first interest rate increase in
more than nine years in a landmark move signaling the US has finally
moved beyond the 2008 crisis.
The move,
which has repercussions across the global financial system, also
imprinted Janet Yellen's personal stamp on US monetary policy after
nearly two years as Fed chair spent plotting to reverse course from the
easy-money stance bequeathed by predecessor Ben Bernanke.
The
Fed raised its benchmark federal funds rate, locked near zero since the
financial crisis, by a quarter point to 0.25-0.50 percent, saying the
world's biggest economy is growing solidly and should accelerate next
year to a respectable 2.4 percent pace.
"This
action marks the end of an extraordinary seven-year period during which
the federal funds rate was held near zero to support the recovery of
the economy from the worst financial crisis and recession since the
Great Depression," Yellen said.
"It
also recognizes the considerable progress that has been made toward
restoring jobs, raising incomes, and easing the economic hardship of
millions of Americans."
The
move was widely expected and marked the end of an era in which the Fed
pumped trillions of cheap dollars into the devastated US economy to fuel
what turned out to be an unexpectedly long rebound.
It
kicks off a likely series of rate increases which the Federal Open
Market Committee, the Fed's policy board, promised would be "gradual"
and follow the pace of the economy.
FOMC projections showed
they expect the rate will rise to about 1.4 percent by the end of 2016,
suggesting four more increases over the coming 12 months.
"The
important question is how far, how fast," said economist Edwin Truman at
the Peterson Institute for International Economics.- Markets react positively -
The announcement, and the Fed's positive outlook for US growth, pushed Asian and US stocks higher, with the S&P 500 finishing with a 1.5 percent gain, most of which came after the Fed's announcement.
Stocks in Australia, Tokyo and Hong Kong were all up, and the dollar rose slightly against the euro.
The
rate increase came amid some criticism from prominent economists that
the economy was still vulnerable to slower global growth and that there
was no compelling reason -- like surging inflation and a tight jobs
market -- to justify it.
But FOMC support for the
decision was unanimous. The committee pointed to "considerable"
improvement in the labor market and said it is "reasonably confident" in
inflation rising over the medium term, to its two percent objective.
"The
first thing that Americans should realize is that the Fed's decision
today reflects our confidence in the US economy," Yellen told a press
conference.
"While things may be uneven across regions of the
country, and different industrial sectors, we see an economy that is on a
path of sustainable improvement."Yellen predicted the challenges of ultra-low inflation and continued slack in the labor market would both diminish significantly over the coming year.
"What we would like to avoid is a situation where we have waited so long that we are forced to tighten policy abruptly, which risks aborting what I would like to see as a very long-running and sustainable expansion," she explained.
- 'Source of strength' -
Analysts said the immediate policy change was only modest and were focused on how the Fed will move in the next year.
The prospect of more increases of the Fed's rate will have a broad impact on the global financial system. It means a higher cost of borrowing for everyone from foreign governments and companies to home and car buyers, while also better rewarding savers on their bank accounts.
The Fed argues that US businesses can continue to invest and hire with a modestly tighter dollar policy.
As for foreign economies, especially emerging markets which have already seen capital outflows and falling currencies due to the expected shift by the Fed, Yellen says they had been forewarned and are in better shape than in the crises of the 1990s.
"This
action takes place in the context of a US economy that is doing well,
and is a source of strength to the emerging markets and other economies
around the globe," she said.
Kathy
Lien of BK Asset Management noted that "the most important monetary
policy event of the year proved to be a dud for market volatility.
"This
muted reaction to a historic change in monetary policy is exactly what
the Federal Reserve likes to see and despite all of their critics, we
see this as a credit to their proper management of market expectations."
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