The Fed's rate hike, in 5 points

1. What did the Federal Reserve do and why?

 The Feds rate hike, in 5 points

Janet Yellen/ AP

The US central bank raised its benchmark federal funds rate for the first time in more than nine years on Wednesday. The rate had been next to zero since December 2008, and was increased by a quarter point to a range of 0.25-0.50 percent. The Fed says the economy has rebounded enough since the Great Recession that the rate should begin rising, albeit slowly.

2. Why is this important?

The rate sets the basis for short-term lending in the financial sector. But, combined with expectations for future rate moves, it also guides longer-term interest rates which affect how much people pay on loans to buy homes and cars, how much businesses pay to finance their activities, and how much banks pay savers for deposits. It also has a big impact what foreign companies and governments pay to borrow.

3. What is the significance of Wednesday's increase?

Generally speaking, the Fed cuts rates when growth is weak to stimulate spending and investment, and increases them to rein in overly fast growth. In this case, after keeping the rate extraordinarily low for so long, the Fed is pushing it higher to get ahead of any potential inflationary pressures and ensuring markets such as those for stocks and property do not overheat on easy money. But because economic growth remains only moderate, the Fed promises to keep the rate relatively low for the foreseeable future to encourage investment and spending.

4. Why have some objected to a rate increase?

Some economists say global growth is too weak, and US growth too vulnerable, to begin raising the cost of money, which they say could discourage investment and hiring. To encourage growth, the central banks of Europe, China and Japan have eased policy rather than tightening it. Some warn that if the US economy slows, the Fed will have to reverse course and lose credibility.

5. What was the immediate impact?

Markets had ample warning that this was coming to prepare, and interest rates in many cases had already risen. On Wednesday stock markets around the world pushed solidly higher, and on Wall Street the S&P 500 was up 0.7 percent about 15 minutes after the rate announcement.

The US dollar, which has been stronger all year, rose 0.1 percent to $0.9498 per euro.


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Updated Date: Dec 17, 2015 02:46:44 IST