The US Federal Reserve (Fed) has raised interest rates for the first time in almost a decade by a quarter of a percentage point. The historic and unanimous decision by the Fed's Open Market Committee (FOMC) on 16 December follows a two-day meeting in Washington.
The first rate hike – by 0.25% to between 0.25% and 0.5% – since June 2006 by the Fed closes the chapter on an unprecedented era of easy monetary policy. The US central bank sets the base cost of borrowing and as a major determinant of the global economy, the move will have ramifications worldwide. In September, the World Bank warned that a rate rise could adversely affect emerging economies caused by disruption to capital flows.
"The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective," the FOMC said in a statement. Explaining the decision on the momentous increase in interest rates, it added: "Given the economic outlook, and recognising 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 [0.25%] to 1/2 percent [0.5%]."
Speaking after the decision, Fed Chair Janet Yellen said that the US labour market had shown considerable improvement, with 2.3 million jobs adding to the economy. Yellen noted that "US real gross domestic product (GDP) is estimated to have increased at an average pace of 2.25% over the first three quarters of the year".
Yellen warned that the move should not be overblown, saying the increase by 25 basis points is not a major adjustment. Not wanting to risk another recession, Yellen also indicated that rate changes will be gradual, saying that with incremental changes, "economic activity will continue to expand at a moderate pace and labour market indicators will continue to strengthen."
The Fed very slightly raised its forecast on economic growth in the US next year to 2.4% from 2.3%, indicating that the central bank does not expect the rate hike to harm growth. The Confederation of British Industry (CBI) has said that it does not expect the decision to act as a catalyst for raising interest rates in the UK. "Alongside the US, the UK has been one of the best performing advanced economies in recent years, but the Bank of England probably still has a way to go before rising inflationary pressures at home persuade it to follow and up interest rates," the CBI's director of economics, Rain Newton-Smith told the BBC.