The Federal Reserve today ended an era of near-zero U.S. interest rates with a rise of 0.25% in the baseline Federal Funds Rate, completely in line with market expectations. The FOMC voted unanimously in favor of the rise.
The statement emphasized that further hikes are expected going forward, but that they will be made “gradually”. Analysts see this as a cognizance of the continuing fragility of the U.S. and global economy, which must be allowed to take baby steps before it can run without extremely cheap money.
The consensus expectation now stands at four further quarter-point rises occurring during the course of 2016.
There is some confusion over inflation: the Fed say they are “reasonably confident” that the 2% inflation target will be reached over the medium term, but they express some surprise that inflation has been so difficult to create. Yellen noted later that U.S. wage growth has remained disappointing.
Overall, the statement and economic projections have been seen slightly more dovish than the market consensus had been expecting. This was matched by the first hour of market movements following the announcement.
One hour after the headline announcement, the benchmark S&P 500 stock index was up 0.74%, while the US Dollar Index was practically unchanged, with the USD earlier having failed to make new highs against several major currencies. Gold was trading up 0.18%. Treasury bills were up earlier with the 2 year note touching a 5 year high following the announcement.
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