Fed raises its benchmark interest rate to 0.50%, first hike in nearly a decade
Eight years after a devastating recession opened an era of loose U.S. monetary policy, the Federal Reserve was set on Wednesday to raise rates for the first time since 2006, in a sign the world’s largest economy had overcome most of the wounds of the global financial crisis.
A decision will be released at 2 p.m. (1900 GMT), with markets prepared for an initial 25 basis point “liftoff” that would move the Fed’s target rate from the zero lower bound to a range of between 0.25 and 0.50 percentage points. It is to be followed by a news conference by Fed Chair Janet Yellen to elaborate on the central bank’s latest policy statement.
A Dec. 9 Reuters poll showed the likelihood of a hike on Wednesday was 90 percent with economists forecasting the federal funds rate to be 1.0-1.25 percent by end-2016 and 2.25 percent by end-2017.
Markets set a positive stage for the Fed’s potentially historic turn as U.S. stock futures rose ahead of the market open on Wednesday and bond markets and the dollar were steady. Analysts said that after weeks of preparation a surprise decision not to hike would be the more disruptive choice.
“It is a foregone conclusion that the Fed is going to raise rates,” said Kully Samra, a managing director at U.S. focused investment manager Charles Schwab in London.
The rate hike will separate the Fed from major central banks in Tokyo, Frankfurt, Beijing and elsewhere that are all battling to stimulate their economies and generate growth. There were signs that the underlying strength of the U.S. consumer-led economy would continue even after a rate rise.
A hike on Wednesday would still leave U.S. policy extremely loose, and Fed officials have signaled they will act cautiously from that point forward to nurture a tepid recovery.
Markets and analysts will focus on the exact language the Fed uses in its statement to justify the hike and describe how it will evaluate the timing of subsequent steps.
Analysts at TD Securities said they expected the statement and updated economic forecasts from policymakers to take a hawkish tilt that emphasizes every meeting will be “live” for a possible hike.
