16th December 2015
With the US economic recovery on track the Federal Reserve has finally flicked the switch and raised interest rates by 0.25%.
The cost of borrowing in the world’s largest economy has been at near zero since 2008 and the last time the central bank upped interest rates, was back in 2006.
The move, said Fed chair Janet Yellen, “marks the end of an extraordinary seven year period”.
The Fed also raised its forecasts for economic growth for 2016, from 2.3% to 2.4%.
Wednesday’s announcement was widely expected, given that the US is enjoying continued economic growth, with decent employment numbers being posted and wages rising.
Tom Stevenson, investment director for personal investing at Fidelity International said: “After almost a decade of rock-bottom interest rates, the Federal Reserve has finally put an end to the ‘will-they-won’t-they’ uncertainty that has hung over markets throughout 2015.
“The Fed has gone to extraordinary lengths to persuade investors that the trajectory of rate rises over at least the next couple of years will be very shallow. The Fed’s estimates are for a long and steady climb, with only a modest expected tightening of around 1% in both 2016 and 2017.”
Christopher Mahon, director of asset allocation research at Baring Asset Management, said he expects the Fed to be watching the market’s reaction closely.
He added: “This means they are likely to proceed very slowly and cautiously. The Fed’s caution means there is a difference between moving gently off the emergency rate of 0% and the withdrawal of liquidity that comes with a true rate hiking cycle.
“What we have seen today is not the Fed taking away the punchbowl but instead a very mild watering down of the liquor itself. But make no mistake: that liquor is still potent. The rates are still exceptionally low and monetary policy is still being set with a view to encourage growth, not rein growth in.”