Federal Reserve System Raises Interest Rates for the 1st Time Since 2006

Federal Reserve System Raises Interest Rates for the 1st Time Since 2006

The US Federal Reserve has increased interest rates by 0.25% after seven years at near zero.

America’s central bank had slashed the cost of borrowing during the downturn to try to help the world’s biggest economy recover. Rates have not been increased since 2006.

The decision by the Fed’s rate-setting committee was unanimous. They have taken action because they judge that the US economy is now strong enough to be weaned off the life support of low rates that have sustained the recovery. US stock markets rose.

Fed chair Janet Yellen said it showed “the considerable progress that has been made towards restoring jobs, raising incomes and easing the economic hardships of millions of Americans” and confidence “that the economy will continue to strengthen”.

She cited a surge in jobs though conceding that the US labour market had room for improvement, and also acknowledged that inflation remained too low while risks from abroad remained – though saying these had lessened.

Markets are expecting that the hike is the first of a series of increases by the central bank into next year as monetary policy returns to normal.

The committee said that allowing for these “gradual adjustments” economic activity would continue to expand at a moderate pace and the jobs market would continue to strengthen.

But it also indicated that economic conditions were likely to develop in a manner that meant rates would increase only gradually and would remain “for some time below levels that are expected to prevail in the longer run”.

A hike by the Fed will heighten speculation about the timing of a rate rise in the UK, where interest rates have been held at the historic low of 0.5% since 2009.

But Bank of England governor Mark Carney has appeared to play down the prospect that it would follow suit – with Britain seeing near-zero inflation and slowing wage growth.

Chris Beauchamp, senior market analyst at IG, said: “When Janet Yellen promises, she delivers. That is the message many will take away from the Fed decision tonight.”

He said the absence of dissent in the decision and reassurance that further rises would be gradual would help stock markets see gains over the next couple of weeks.

“The problem now is that the easy part is done with,” Mr Beauchamp added. “Now attention turns to the path of further rate increases in 2016 and beyond.”

The hike means that rates have been raised from a range of 0-0.25% to 0.25%-0.5%.

John Longworth, director-general of the British Chambers of Commerce, said: “The Federal Reserve has done what the markets have expected, but on this side of the Atlantic we need to wait and see how a US rate rise affects the economy before the MPC considers following suit.

“There is still a risk of a global slowdown in an indebted world, especially if the Fed raises rates too quickly.”

But James Sproule, chief economist at the Institute of Directors, said there would “always be a thousand possible excuses not to raise rates”.

He added: “We must take account of the exceptional circumstances in which we find ourselves. We are probably close to peak employment in the UK, with employment growth set to plateau next year. All these factors should encourage rate-setters in the UK to think seriously about raising rates in early 2016.”

The Fed move may have repercussions across the globe including in emerging markets where there are fears that starting to turn off the flow of cheap dollars from the US will hurt investment.

But as the much-anticipated decision approached, stock markets had climbed as investors looked ready to swallow the hike as the sign of a return to calmer, normal conditions.

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