WASHINGTON (AP) — The latest on the Federal Reserve’s landmark two-day policy meeting that ended Wednesday. The central bank raised interest rates for the first time in nearly a decade. All times local.
Asian stock markets follow Wall Street in cheering the Fed’s rate hike and its signal that future increases will be gradual. Emerging market currencies fall back against the dollar.
Japan’s Nikkei 225 jumps 2 percent and Hong Kong’s Hang Seng rises nearly 1 percent. China’s Shanghai Composite gains 1.5 percent. The dollar was up 0.5 percent against the Korean won and gained 0.2 percent versus the Indian rupee and Indonesian rupiah.
AMP Capital’s head of investment strategy Shane Oliver says the Fed’s move “signals confidence in the ongoing recovery in the U.S. economy after the Great Financial Crisis.”
He expects share markets to resume a rising trend though Wall Street will be a relative underperformer.
The stock markets cheered the Fed rate hike, but some economists saw the central bank as acknowledging how little it knows about where the economy might be headed.
The Fed statement hedged the possibility that inflation might not pick up much and acknowledged that global pressures could influence its choices going forward, said Charles Calomiris, a professor of economics and finance at Columbia University.
The global headwinds stemming from difficulties in emerging economies such as China, Russia and Brazil could further suppress inflation and hurt hiring, possibilities that the Fed might struggle to model.
“The Fed is much more uncertain itself about what is going on in the economy and willing to express that,” Calomiris said. “It doesn’t have a very clear model of how the economy is functioning.”
Bank of America says it is increasing the prime lending rate to 3.5 percent effective immediately, while Citibank, M&T Bank and PNC Financial plan to make the change effective Thursday. They join other banks that have announced similar moves, including Wells Fargo, JPMorgan Chase and U.S. Bancorp.
A bank’s prime rate is the interest rate banks use to price several of its consumer products, including auto loans and credit cards.
Stocks rose and bond yields fell after the Fed made its announcement and Yellen stressed that any future rate increases would be gradual. The Dow was up 250 points in late trading. The yield on the 10-year Treasury note rose to 2.30 percent. Bond yields tend to rise when investors expect interest rates and inflation to increase.
Not everyone is thrilled with the Fed move.
Democratic presidential candidate and Vermont Sen. Bernie Sanders says the Fed rate hike will hurt American workers. Sanders — one of former Fed Chair Ben Bernanke’s least favorite politicians — is tapping into sentiment that the country has yet to fully escape the clutches of a recession that officially ended six years ago.
“When millions of Americans are working longer hours for lower wages, the Federal Reserve’s decision to raise interest rates is bad news for working families,” Sanders said in a statement. “The Fed should act with the same sense of urgency to rebuild the disappearing middle class as it did to bail out Wall Street banks seven years ago.”
Two other major consumer banks wasted no time in raising interest rates on their consumer products, following the Fed’s decision to raise interest rates.
JPMorgan Chase and U.S. Bancorp said Wednesday that their prime rate would rise 0.25 percentage points to 3.5 percent, effective tomorrow. A bank’s prime rate is the interest rate banks use to price several of its consumer products, including auto loans and credit cards. If a bank raises its prime rate, it means your credit card rate is also rising.
Fed Chair Janet Yellen indicated that Wednesday’s rate hike was partially defensive. If rates stayed at near zero, the Fed might not have the tools to combat a recession.
“We’ve worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks,” she said at a news conference.
When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy. But by staying close to zero, the Fed would be unable to cut rates or it would be forced to have negative rates for the first time in its history.
Fed Chair Janet Yellen stressed that Wednesday’s rate hike was pre-emptive. Inflation still remains well below the central bank’s 2 percent target, largely because of transitory factors such as falling oil prices.
Yet the Fed made the move despite low inflation because its policies operate on a lag. This means that Yellen wanted to head off the risk of sharply higher inflation a year from now, rather than today.
“It takes time for monetary policy actions to effect future economic outcomes,” she said at a news conference.
Shortly after the Fed’s rate announcement, major banks began announcing that they were raising their prime lending rate from 3.25 percent to 3.50 percent. The prime rate is a benchmark for many types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike.
Fed officials feel a tad more optimistic about the U.S. economy in 2016, a vote of confidence that the rate hike won’t disrupt growth.
They increased their median projection for economic growth next year to 2.4 percent, up from 2.3 percent in their prior September projections. Fed officials also anticipate slightly less inflation and slightly lower unemployment in 2016 compared to their prior estimates. But be forewarned: Fed forecasts about economic growth have been notoriously inaccurate during the more than six-year recovery from the Great Recession.
The Fed just lifted rates, ending seven years of an extraordinary measure to combat the damage from the 2008 financial crisis.
Fed officials voted unanimously to raise the key federal funds rate — the interest banks charge each other overnight — to a range of 0.25 percent to 0.5 percent, up from near-zero for the first time since December 2008.
Fed officials made the move in response to seemingly robust 5 percent unemployment. But in addition to maximizing employment, the Fed is responsible for maintaining stable prices. Inflation remains below the Fed’s 2 percent target. The statement by the central bank acknowledged the drag from declines in energy prices and decline in inflation expectations, even though it still expects to reach its target “over the medium term.”
The result is that any future rate hikes will be “gradual” and depend on further progress toward the inflation goal.
The Fed decision will be released at 2 p.m. Eastern Standard Time. Markets are bracing for news about whether the U.S. central bank will raise rates for the first time in nearly a decade — and the path of possible rate hikes in the year ahead.
The S&P 500 stock index is up 0.3 percent to 2050, down slightly from its early morning gains. West Texas Intermediate crude oil has slipped roughly 4 percent to around $36 a barrel. This is a crucial sign that the rising inflation Fed officials expect to see might remain elusive, as cheaper oil undercuts the economy’s ability to achieve the Fed’s 2 percent target.
U.S. stocks have opened sharply higher Wednesday with investors seemingly relieved that the Fed will finally raise interest rates after months of speculation.
The Dow Jones index was up 0.7 percent at 17,643 while the broader S&P 500 index rose 0.6 percent to 2,055.
The increases came despite the news that U.S. industrial output fell for the third straight month in November, another sign that American manufacturers are under stress. The 0.6 percent monthly decline was markedly more than the 0.1 percent drop anticipated in the markets.
“Anything but a hike tonight would be a very big surprise to the market,” said Karl Steiner, an analyst at Nordic bank SEB.
European stock markets pushed ahead as futures markets predicted a solid open on Wall Street ahead of the expected rate hike from the Fed.
Despite a faltering start to Wednesday’s session, the Stoxx 50 index of leading European shares was up 0.7 percent. European shares are tracking the anticipated open on Wall Street. Futures markets are pointing to a 0.5 percent advance of the Dow at the bell.
Though some in the markets question the ability of the U.S. economy to withstand higher U.S. interest rates, there is relief that the uncertainty over the Fed’s intentions is coming to an end.
“Whether this optimism turns into a full blown Santa rally or not will depend on the Fed’s ability to manage expectations and reassure investors than the tightening cycle will be very gradual,” said Craig Erlam, senior market analyst at OANDA in London.
Most Asian stock markets are finishing with big gains as anticipation builds for the Fed’s decision on whether to raise rates after seven years at ultralow levels.
Stock markets have benefited from low interest rates but a Fed rate hike can also be interpreted as a vote of confidence in the world’s biggest economy. And it could weaken Asian currencies against the dollar, potentially boosting the trade-reliant region’s exports.
Japan’s Nikkei 225 closed 2.6 percent higher. South Korea’s Kospi finished with a gain of 1.8 percent.
Hong Kong’s Hang Seng rebounded from a nine-day losing streak to advance 2 percent but gains were less robust on the Shanghai Composite Index in mainland China, which closed 0.2 percent higher. Australia’s S&P/ASX 200 added 2.4 percent.
Investors in Asia won’t learn of the Fed’s decision until they wake up Thursday morning.
European benchmarks were muted in early trading. France’s CAC 40 dipped 0.1 percent while Britain’s FTSE 100 added 0.3 percent. Germany’s DAX was little changed.