US Federal Reserve hikes benchmark interest rate

Washington, Rabi’I 16, 1438, December 15, 2016, SPA — The US Federal Reserve hiked its benchmark
interest Wednesday for only the second time since setting an
unprecedented, near-zero target during the depths of the 2008 financial crisis, according to dpa.
The central bank said that “realized and expected labour market conditions and inflation” were at levels to justify a hike in the key short-term rate by 0.25 percentage points to a range of 0.5 to 0.75 per cent.
Chairwoman Janet Yellen called the Fed’s unanimous action a “modest” increase.
In a statement after this week’s two-day Fed meeting, the monetary-policy committee said: “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a return to 2-per-cent inflation.” The Fed is eyeing multiple interest rate hikes in 2017.
Fifteen of the monetary-policy committee’s 17 participants expect at least two increases in increments of 0.25 percentage points, according to a summary of the Fed’s economic projections. Eleven of the 17 anticipate three hikes next year.
The projections suggest growing inflation concerns among Fed members, who have kept extraordinary monetary policies in place for years while waiting for hints of inflation.
On Wall Street, where the rate hike was fully expected based on Fed communications in recent months, the blue-chip Dow Jones Industrial Average closed 0.6 per cent lower Wednesday. The broader Standard & Poor’s 500 Index lost 0.81 per cent, while the technology-heavy NASDAQ Composite Index was off 0.5 per cent.
The Fed noted “solid” job gains, with the unemployment rate falling, while economic activity “has been expanding at a moderate pace since mid-year.” Inflation remains below the Fed’s 2-per-cent long-term objective.
The Fed “expects that economic conditions will evolve in a manner that will warrant only gradual increases” in the benchmark interest rate.
The Fed first implemented a quarter-point increase a year ago in the key Federal Funds rate, which had been at a range of zero to 0.25 per cent since December 2008.
At the time, the Fed issued expectations for at least two and easily four similar hikes by the end of 2016. Instead there were no hikes – until Wednesday, when the monetary-policy committee concluded its last scheduled meeting of the year.
The rate increases are the latests steps in the central bank’s long process of normalizing monetary policy after the global financial crisis, which arose amid the severe 2007-09 US recession.
The Fed began cutting back its programme of buying government-backed bonds, so-called quantitative easing, in December 2013, halted the purchases in October 2014 and began raising interest rates in December 2015.
The government’s November employment report found a one-month drop from 4.9 per cent to 4.6 per cent, a breakthrough after the jobless rate had hovered close to 5 per cent for more than a year.
Consumer prices in the United States rose 0.4 per cent in October, the fastest monthly pace in more than six months. During the last 12 months, the US inflation rate was 1.6 per cent.
Excluding volatile food and energy, so-called core inflation was at 2.1 per cent for the last 12 months. The Labour Department’s report on the consumer price index for November is due Thursday.
The US economy rebounded in the third quarter after an anaemic first half of 2016.
Gross domestic product for the July-September period grew at an annualized rate of 3.2 per cent, the Commerce Department said last month. Growth was only 1.4 per cent in the second quarter and 0.8 per cent in the January-March period.
–SPA
01:27 LOCAL TIME 22:27 GMT