US Federal raises interest rates by 25bps, first in nine years

The US Federal Reserve on Wednesday announced to increase the key interest rates by a quarter point, ending an extraordinary seven-year-long period of easy money and near-zero rates in the world’s biggest economy.

Federal Reserve Chairwoman Janet Yellen made the much-awaited announcement, lifting its key rate by a quarter-point to a range of 0.25 per cent to 0.5 per cent, the first hike in nearly a decade, signalling the US economy has finally recovered sufficiently from the severe recession that started with 2008 economic crisis.
In a statement, the Federal Reserve said economic activity has been expanding at a moderate pace and should accelerate by 2016.

“Given the economic outlook, and recognising the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 per cent,” the Federal Reserve said.

The move, which was widely expected, marks the end of near decade-long era of easy money when the Federal Reserve pumped billions of dollars in the US economy to fend off another Great Depression like situation in the country.

In a statement, the Federal Reserve said economic activity has been expanding at a moderate pace and should accelerate by 2016.

Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft, it added.

“The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labour market conditions and a return to 2 per cent inflation,” the statement said.

“With gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labour market indicators will continue to strengthen,” the Fed said in its official statement.

The statement also suggested that further rate hikes would be “gradual” and follow the pace of the US economic recovery, indicating the Central bank is planning to maintain historically low interest rates well into 2016 as well. The 0.25 per cent hike in its federal funds rate will be followed only by “gradual adjustments” and can be slowed if economic activity doesn’t expand at an expected pace, Yellen said.

Admitting, there still remain some risks to a full-throttled recovery of the US economy, Yellen said “these risks appear to have lessened since last summer”. The announcement also pushed US stocks a bit higher.

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