Rates hike for US Federal Reserve

(File)
(File)

The US Federal Reserve has lifted interest rates for the first time since 2006.

The Fed’s key lending rate was cut to virtually zero in the wake of the global financial crisis.

Fed officials voted unanimously to raise the key federal funds rate (the interest rate banks charge each other overnight) to a range of between 0.25 percent and 0.5 percent.

The move had been widely anticipated by the markets. Federal Reserve head Janet Yellen had been signalling for months that a rate hike was likely because the US economy is improving.

“This action marks the end of an extraordinary seven-year period, during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” she said today.

“It also recognises the considerable progress that has been made toward restoring jobs, raising incomes and easing the economic hardship of millions of Americans. And it reflects the committee's confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, although it is not yet complete."

Higher rates are likely to drive up the value of the US dollar and weaken the Kiwi. That is because higher rates make it more attractive for investors to put their money into the United States. But higher rates will also add to the costs for any individuals, companies, banks or nations that have borrowed money in the US markets.

The currency markets will be governed by expectations about the pace of future interest rate movements.

The Fed said the pace of any future rate hikes will be “gradual.” It will be governed by economic indicators like unemployment, and by inflation. Inflation is below the Fed’s two percent target range.

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