US Federal Reserve Hikes Interest Rates

As expected, the US Federal Reserve raised interest rates Wednesday.

This article has been updated since it was published.

In a move many expected, the US Federal Reserve announced Wednesday that it will be hiking interest rates for the first time since 2006. The central bank unanimously decided to raise the target range of the federal funds rate to 0.25 to 0.5 percent.

“The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” the Federal Open Market Committee (FOMC) said in a press release following the meeting. “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Federal Reserve keyword: Gradual

For investors, the key takeaway from the Fed’s decision is that the FOMC is committing to a gradual change. As Fed Chair Janet Yellen commented, “[i]t’s important not to overblow the significance of this first move.”
Essentially, while the rate hike shows that the Fed is confident that the US economy is getting strong enough to stand on its own, it will remain cautious about raising rates further. “The Fed is [saying] we’re going to raise rates a tiny bit, and then maybe in 2016 a tiny bit more,” Diane Swonk, chief economist of Mesirow Financial, told CBC, “[b]ut they want to acknowledge that the economy is strong enough to handle this, without hurting any growth.”
Moving forward, Yellen said that the Fed “will be watching very carefully what happens in the economy … and will adjust policy gradually over time.” More specifically, the central bank will continue to assess both realized and expected economic conditions relative to its objectives of maximum employment and 2-percent inflation.

The winners

By and large, the markets reacted positively to the news.
For instance, the S&P/TSX Composite index (INDEXTSI:OSPTX) posted a triple-digit gain, jumping 236.53 points to hit 13,153.1 points, while the S&P/TSX Venture Composite index (INDEXTSI:JX) rose 2.88 points to reach 498.63 points. The Dow Jones Industrial Average (INDEXDJX:.DJI) also enjoyed a triple-digit rise, gaining 233.16 points to hit 17,7587 points; meanwhile, the NYSE Composite (INDEXNYSEGIS:NYA) was up 156.69 points, to 10,267.63 points.
The gold price also rallied Wednesday after the Fed meeting, rising $10.20 to trade at $1,071.80 per ounce. That’s encouraging news given recent concerns that a rate rise would hurt the yellow metal. “Gold has held steady as the dovish statement and lower dot plot has leavened the impact of the first rate hike in nine years,” said Tai Wong, director of base and precious metals trading for BMO Capital Markets, told CNBC.
Finally, the US dollar index, which measures the greenback against a basket of six major currencies, showed muted activity following the Fed meeting. The dollar traded within a narrow range earlier in the day before moving higher against its rivals.

Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any of the companies mentioned in this article.