The US Federal Reserve today raised the benchmark interest rate by a quarter percentage point as expected, citing an improving economy, after its first policy meeting since President-elect Donald Trump's election victory.
The policy-setting Federal Open Market Committee voted unanimously to increase the key federal funds rate to a range of 0.5 to 0.75 per cent, but repeated that it expects the economy will require only "gradual" increases going forward.
The rate increase from the previous range of 0.25 to 0.5 per cent is the first hike since December 2015 and only the second in a decade.
The median projection for the federal funds rate rises to
1.4 per cent at the end of next year, 2.1 per cent at the end of 2018, and 2.9 per cent by the end of 2019.
Compared with the projections made in September, the median path to the federal funds rate has been revised up just a quarter of a percentage point. Only a few participants altered their estimate of the longer-run normal federal funds rate although the median edged up to three per cent, she said.
The economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path to the federal funds rate in response to changes to the economic outlook and associated risks, Yellen said.
Soon after the Fed rate increase announcement, Dow took a 207 point dip.
Responding to questions, Yellen emphasised that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, some of the participants.
"So, in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants. The unemployment rate is perhaps a touch lower than previously you have seen some modest downward revisions in that - in that projection. For this year, there was a slight upward revision to inflation," Yellen said.
The decision to raise rates certainly be understood as a reflection of the confidence the Fed has the progress the economy has made and their judgement that progress will continue and the economy has proven to be remarkably resilient, Yellen said.
"So it is a vote of confidence in the economy. As you know, this was a decision that was well anticipated in markets and I think it will have relatively small effect on market rates. It could boost very slightly some short-term interest rates that could have an effect on borrowing costs that are linked to them. But overall, I think that households and firms will see very modest changes from this decision," she added.
