Fed raises rates, as expected

The US central bank on Wednesday raised its main policy rate by 25 basis points, as had been widely anticipated by economists.

Rate-setters in Washington DC hiked the range for the Fed funds rate to between 25 and 50 basis points - by unanimity - following a two-day meeting.

In its policy statement, the central bank emphasised that the pace of tightening going forward would be “gradual”.

"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run," the FOMC said in its policy statement.

From the predictions for the level of interest rates submitted by the FOMC´s members, the Fed´s dot-plot graphs in market parlance, policy makers believed the appropriate rate at the end of 2016 would be 1.375%, the same as they had anticipated in September.

That implied four quarter-point increases in the target range next year, based on the median of the forecasts.

For 2017, the FOMC´s members were now projecting a median Fed funds rate of 2.4%, down from the 2.6% they were anticipating in September.

Policymakers lowered their forecast for core inflation in 2016 and 2017 - as measured by the personal consumption expenditures deflator - but also that for unemployment next year.

Dominic Rossi, Global CIO – Equities, Fidelity International, commented: “US consumers are entering 2016 stronger than in they have been in a decade. US consumption will easily be able to weather the expected modest interest rate increases and the domestic economy may well turn out to post a surprisingly strong performance.

“The strength of the domestic economy leaves the US equity market better placed to cope with tighter monetary policy than other markets. This means that in US dollar terms, we can continue to expect the US market to outperform.”

The yield on the benchmark two-year US Treasury note moved above the 1% level for the first time since 2010 just after the decision.

In a snap reaction, the S&P 500 initially moved lower - dipping into the red - but bounced back right afterwards.

As of 20:15, the US equity benchmark was up by 12 points or 0.57% to 2,055.

"In other words, for next year and 2017, the hawks have become significantly less aggressive, which is surprising to use given recent talk of how higher rates could initially "spur rather than restrain" growth (Sep FOMC minutes). But it's important to stress that none of this means much if the data tell the Fed to do something different over the course of next year and beyond," said Ian Sheperdson, chief economist at Pantheon Macroeconomics.