The US Federal Reserve rate hike really came as no surprise after weeks of hints and signals from chair Janet Yellon.
Table of contents
The Fed hitched up the official interest rate in the US by 0.25% to 0.5% – the first increase in seven years.
Yellen confirmed the rate increase after a two-day session of the Federal Open Market Committee, which thoroughly reviewed financial and economic data in a debate whether to increase the rate now or wait until the New Year.
However, pundits had already criticised the Fed for holding off a rate increase since September.
“The decision to increase the interest rate reflects the confidence we have in the economy to keep on growing,” said Yellen.
US economy diverges from the rest
“The increase is very modest but gives an indication of how we view the current state of the US and global economy and where the future lies.”
Markets have generally accepted the rise in their stride.
The US dollar has also risen on the back of the announcement – pushing the euro down to $1.08.
However, increasing interest rates by the Fed marks a key event in world economics.
The US now has a divergent economic policy from the rest of the world. Many countries have low interest rate environments, but are handling their economies in a different way.
The Eurozone, for instance, is still pursuing a policy of monetary easing and will continue to do so for some time yet.
More rate rises on the way
The Bank of England is expected to follow the US example and raise the official interest rate from the record low of 0.5%. The Bank has pegged the rate for nine years.
Financial experts regard the slight increase in interest rates by the Fed as the start of a ‘normalisation’ of interest rates in the major economies back to between 2% and 3%.
The rate is expected to slowly increase during 2016 to 1.25% by the end of the year.
“We understand that policy changes take some time to work through the system,” said an official announcement from the Fed.
“The economic outcomes we are working towards will take some time to materialise.
Related Articles, Guides and Insights
Below is a list of some related articles, guides and insights that you may find of interest.
Questions or Comments?
We love to get feedback from our readers. So, after reading this article, if you have any questions or want to make comments, send us a message on this site or our social media?