Fed raises interest rates, cites ongoing US economic recovery

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Markets React to Fed Decision to Hike

The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis.

The U.S. central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

SEE MORE: Here's how the Fed's rate decision affects mortgages, auto loans, and credit cards

"With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate," Fed Chair Janet Yellen said in a press conference after the rate decision was announced. "The economic recovery has clearly come a long way."

The Fed's policy statement noted the "considerable improvement" in the U.S. labor market, where the unemployment rate has fallen to 5 percent, and said policymakers are "reasonably confident" inflation will rise over the medium term to the Fed's 2 percent objective.

The central bank made clear the rate hike was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.

"The process is likely to proceed gradually," Yellen said, a hint that further hikes will be slow in coming.

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Fed raises interest rates, cites ongoing US economic recovery
FILE - This March 14, 2014 file photo shows the Federal Reserve headquarters building in Washington. In the minutes of the Federal Reserve's June 17-18 meeting issued Wednesday, July 9, 2014, Fed officials had differing views on the best way to signal to financial markets when they might raise a key short-term interest rate. They were in broad agreement, however, that their monthly bond buying program will end in October. (AP Photo/J. David Ake, File)
The headquarters of the Federal Reserve Bank is seen at sunrise in Washington Saturday, May 24, 2008. (AP Photo/J. David Ake)
The Federal Reserve headquarters stands in Washington on Wednesday, Sept. 18, 2013. During its policy meeting on Wednesday, the Federal Reserve is expected to take its first step toward slowing the economic stimulus it's supplied since the financial crisis and the Great Recession five years ago. (AP Photo/J. David Ake)
The Federal Reserve Building on Constitution Avenue in Washington is seen Friday evening, March 27, 2009, in Washington. The headquarters of the Federal Reserve System was constructed in 1936 in the wake of the Great Depression. (AP Photo/J. Scott Applewhite)
FILE - This Sept. 18, 2013 file photo shows the Federal Reserve headquarters in Washington. Minutes of the Fed's discussion at its July 29-30, 2014 meeting show that some officials thought the economy was improving enough that the Fed would need "to call for a relatively prompt move" toward reducing the support it has been providing. Otherwise, they felt the Fed risked overshooting its targets for unemployment and inflation. (AP Photo/J. David Ake, File)
The Federal Reserve Building on Constitution Avenue in Washington is seen Friday evening, March 27, 2009, in Washington. The headquarters of the Federal Reserve System was constructed in 1936 in the wake of the Great Depression. (AP Photo/J. Scott Applewhite)
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She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. "To keep the economy moving along the growth path it is on ... we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly."

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 percent next year and economic growth hitting 2.4 percent.

WATCH: What happens to the dollar after Fed rate hike?

What Happens to the Dollar After Fed Rate Hike?

The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth.

"The Fed is going out of its way to assure markets that, by embarking on a 'gradual' path, this will not be your traditional interest rate cycle," said Mohamed El-Erian, chief economic advisor at Allianz.

Fed officials said they were confident the situation was ripe for them to make a historic turn in policy without much disruption to financial markets, which had expected the hike this week.

U.S. stocks rallied on the news, in part because the Fed made clear it would proceed slowly with further tightening. Yields on U.S. Treasuries rose, while the dollar was largely unchanged against a basket of currencies. Oil prices fell sharply before paring losses.

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Fed raises interest rates, cites ongoing US economic recovery
Federal Reserve Chair Janet Yellen coughs and takes a long pause during a speech at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The Federal Reserve says Yellen felt dehydrated at the end of the speech and was seen by medical personnel as a precaution. Yellen was delivering a 23-page speech on inflation when toward the end of the speech, she paused for a period of time, giving the appearance of losing her place in the text. She then resumed speaking, saying she wanted to wrap up. She was helped from the stage. (AP Photo/Jessica Hill)
Janet Yellen, chair of the U.S. Federal Reserve, pauses while speaking during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Janet Yellen, chair of the U.S. Federal Reserve, speaks during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Federal Reserve Chair Janet Yellen speaks on inflation dynamics and monetary policy at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The talk comes one week after the central bank decided to keep interest rates at record low, in part because of persistently low inflation. (AP Photo/Jessica Hill)
Attendees applaud as Janet Yellen, chair of the U.S. Federal Reserve, not pictured, concludes her speech during the annual Philip Gamble Memorial Lecture at the University of Massachusetts Amherst in Amherst, Massachusetts, U.S., on Thursday, Sept. 24, 2015. Yellen said the U.S. central bank is on track to raise interest rates this year, even as she acknowledged that economic 'surprises' could lead them to change that plan. Photographer: Scott Eisen/Bloomberg via Getty Images
Federal Reserve Chair Janet Yellen is assisted down from the podium by University of Massachusetts economics professor Michael Ash after a speech at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The Federal Reserve says Yellen felt dehydrated at the end of the speech and was seen by medical personnel as a precaution. Yellen was delivering a 23-page speech on inflation when toward the end of the speech, she paused for a period of time, giving the appearance of losing her place in the text. She then resumed speaking, saying she wanted to wrap up. She was helped from the stage. (AP Photo/Jessica Hill)
Federal Reserve Chair Janet Yellen, left, pauses as University of Massachusetts economics professor Michael Ash, right, watches after her speech, Thursday, Sept. 24, 2015, in Amherst, Mass. The Federal Reserve says Yellen felt dehydrated at the end of the speech and was seen by medical personnel as a precaution. Yellen was delivering a 23-page speech on inflation when toward the end of the speech, she paused for a period of time, giving the appearance of losing her place in the text. She then resumed speaking, saying she wanted to wrap up. She was helped from the stage. (AP Photo/Jessica Hill)
Federal Reserve Chair Janet Yellen speaks on inflation dynamics and monetary policy at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The talk comes one week after the central bank decided to keep interest rates at record low, in part because of persistently low inflation. (AP Photo/Jessica Hill)
Federal Reserve Chair Janet Yellen speaks on inflation dynamics and monetary policy at the University of Massachusetts, Thursday, Sept. 24, 2015, in Amherst, Mass. The talk comes one week after the central bank decided to keep interest rates at record low, in part because of persistently low inflation. (AP Photo/Jessica Hill)
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POLICY STILL ACCOMMODATIVE

Yellen on Wednesday said the Fed had no desire to curb consumers from spending or businesses from investing. She emphasized that interest rates remained low even after the rate hike, near levels economists regard as appropriate for a recession.

"Policy remains accommodative," Yellen said. "The U.S. economy has shown considerable strength. Domestic spending has continued to hold up."

Fed policymakers' median projected target interest rate for 2016 remained 1.375 percent, implying four quarter-point hikes next year. Based on short-term interest rate futures markets, traders expect the next rate hike in April. (Full Story)

A Dec. 9 Reuters poll showed economists forecasting the federal funds rate to be 1.0 percent to 1.25 percent by the end of 2016 and 2.25 percent by the end of 2017.(Full Story)

The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising U.S. rates sets in.

To edge the target rate from its current near-zero level to between 0.25 percent and 0.50 percent, the Fed said it would set the interest it pays banks on excess reserves at 0.50 percent, and would offer up to $2 trillion in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher. (Full Story)

The impact on business and household borrowing costs is unclear. One of the issues policymakers will watch closely in coming days is how long-term mortgage rates, consumer loans and other forms of credit react to the rate hike.

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