The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be “gradual” and in line with previous projections.

The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

 “The committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective,” the FOMC said in a statement Wednesday following a two-day meeting in Washington. The Fed said it raised rates “given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes.”

The increase draws to a close an unprecedented period of record-low rates that were part of extraordinary and controversial Fed policies designed to stimulate the U.S. economy in the wake of the most devastating financial crisis since the Great Depression. The FOMC lowered its benchmark rate to near zero in December 2008, three months after the collapse of investment bank Lehman Brothers Holdings Inc. and 10 months before unemployment in the U.S. peaked at 10 percent.

David Fuller's view

I am glad to see the passing of this long awaited milestone in US monetary policy, which is also a justifiable vote of confidence in the USA’s economic outlook.  The Fed also repeated its comment that subsequent increases will be gradual.  However, I was mildly surprised by the forecast of four additional quarter-point increases in 2016.  Janet Yellen’s Fed had previously taken a “based on subsequent events” approach, which made sense under the circumstances over the last year.  

I assume the Fed wants to be more proactive by expressing confidence. That makes sense, especially as business and consumer sentiment has been fragile since the credit crisis recession.  Nevertheless, the Fed would not have given that forward guidance on rates, in my opinion, unless it was confident that it could keep a lid on the Dollar Index with further covert intervention as necessary.  

That will be necessary as other economic regions are relying on QE and gradual devaluation of currencies, in order to revive their economies.  The Fed will not want the Dollar to spike higher while it is raising US rates.  The rule of thumb estimate is that every 10% surge in the US currency knocks 1 point off US GDP growth. 

Lastly, my frequent refrain in recent weeks was that the approaching US rate hike today was a likely ‘sell the rumour, buy the news’ event.  Today’s Wall Street close is encouraging and the anticipatory rally commenced on Monday in line with short-term oversold indicators shown on these daily charts: DJIA, S&P 500 and Nasdaq Composite.            

(See also: U.S. Federal Open Market Committee December 16 Statement: Text)