The United States Federal Reserve on Wednesday raised its benchmark short-term interest rates by 0.25% after keeping it around zero since the start of the 2008 financial crisis.
The hike, announced after a meeting of the Fed’s top policy-making body Federal Open Market Committee, was widely expected and went along anticipated lines.
“Given the economic outlook, and recognizing 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 Fed said in a statement.
“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 per cent objective.”
India has been watching developments on this front closely. RBI governor Raghuram Rajan said last week he was expecting a hike of around 25 basis points, 0.25%.
It is also better prepared than it was in 2013 when the rupee got mauled in the worldwide turmoil triggered by chairman Ben Bernanke’s remarks about an impending hike.
The Fed cut interest rates to near zero in the aftermath of the 2008 financial crisis to encourage lending, spending and investments to get the US economy back on its feet.
It did so buying back US government securities to inject liquidity in the market through a monetary policy called Quantitative Easing, which, some say, had mixed results.
Wednesday’s rate hike, though small, is seen as a sign of how much the US economy has healed since the 2007-2008 financial crisis. The central bank apparently believes the US economy is stronger.
Explaining the Fed’s historic decision, Janet Yellen, the first woman Fed Chair in the bank’s 112-year history, told a press conference that Fed decided to move now because it felt it was on course to hit its goals.
“We decided to move at this time because we feel the conditions we set out, for a move, namely further improvement in the labour market and reasonable confidence that inflation would move back to 2 percent in the medium term, we felt these conditions had been satisfied,” she said.
“We have been concerned about the risks from the global economy and those risks persist, but the US economy has shown considerable strength,” Yellen said. But “don’t “overblow the significance of this first move,” she said reminding reporters, “It’s only 25 basis points. Monetary policy remains accommodative.”
Stocks rallied with the Dow rising over 100 points after the announcement, CNN reported. Investors were pleased to see that the Fed expects “only gradual increases” in interest rates next year.
The Fed put interest rates near zero during the financial crisis in December 2008 to help stimulate the economy and boost the collapsed housing market.
But the economy is now a lot healthier with unemployment at 5%, half of the 10% rate it hit in 2009 during the worst of the jobs crisis.
Known as “liftoff,” the Fed’s action is expected to be the first of more rate increases that will probably come in 2016, CNN said.
The last rate hike was in June 2006 culminating a steady series of rate hikes that began two years earlier.
With inputs from agencies