Finance Finance News Historic interest rate hike in the US

Historic interest rate hike in the US

Federal Reserve Chair Janet Yellen following the announcement.
Federal Reserve chair Janet Yellen: markets will be hanging on her every word. Photo: AAP
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The Federal Reserve has hiked interest rates for the first time in nearly a decade, signalling faith that the US economy had largely overcome the wounds of the 2007-2009 financial crisis.

The US central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

“The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its two per cent objective,” the Federal Reserve said in its policy statement on Thursday (AEDT), which was adopted unanimously.

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The central bank made clear that the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.

“In light of the current shortfall of inflation from two per cent, the committee will carefully monitor actual and expected progress toward its inflation goal. The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the Reserve said in the statement.

New economic projections from central bank policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 per cent next year and economic growth at 2.4 per cent.

The statement and its promise of a gradual path represents a compromise between those who have been ready to raise rates for months and those who feel the economy is still at risk.

The median projected target interest rate for 2016 remained 1.375 per cent, implying four quarter-point rate hikes next year.

To edge that rate from its current near-zero level to between 0.25 per cent and 0.50 per cent, the Reserve said it would set the interest it pays banks on excess reserves at 0.50 per cent, and said it would offer up to $US2.0 trillion ($A2.8 trillion) in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher.


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