US Fed raises rates by 25 bp, first hike since 2006

Dec 17, 2015 (LBO) – The US Federal Reserve has raised interest rates by 25 basis points, its first increase since 2006.

Fed Chair Janet Yellen said the move would be followed by “gradual” tightening as officials watch for signs of higher inflation.

The target for the Fed funds rate was unanimously set at 0.25 percent to 0.5 percent, up from zero to 0.25 percent, with officials indicating four quarter-point increases were likely in the next year.

U.S. stocks rallied with the S&P 500 index closing up 1.45 percent, the Dow Jones Industrial Average up 1.28 percent and Nasdaq up 1.45 percent.

Asian stocks rose in response with Nikkei up 2.1 percent and Hang Seng up 2.01 percent at 1.35 GMT. The dollar was higher at 1.0859 against the euro.

In a statement, the committee said: “The committee judges that there has been considerable improvements in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.”

“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 percent.”

The committee added that: “The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”

The Hong Kong Monetary Authority raised its rates by 25 basis points, matching the Fed, raising its base rate to 0.75 percent.

In the past interest-rate increases from the Federal Reserve have been buy signals for emerging-market assets tied to stronger U.S. growth.

Opinion remains divided on the impact on emerging markets with some analysts expecting an emerging markets sell off to continue, while ABN AMRO said recently that the US rate hike has largely been priced in to emerging markets.

The FOMC statement can be viewed here