The United States Federal Reserve on Wednesday hiked its interest rates by 25 basis points (0.25%), lower than the 0.75% to 1% hike investors had been bracing themselves for. The decision was based on economic growth in the country, including “solid” gains in the jobs market, “somewhat firmed” business investment sentiment and an inflation rate that was “moving close” to the 2% target, the Federal Open Market Committee said in its statement.
“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” it added. “The committee expects that economic condition will evolve in a manner that will warrant gradual increases in the federal funds rate,” Bloomberg reported.
The US central bank projected two more raises in rates in 2017, indicating that it aims to tighten monetary policy as the economy inches closer to its inflation target. Its quarterly median projections show inflation estimated to reach 1.9% in the fourth quarter this year and 2% in 2018 and 2019. Central bankers forecast a 4.5% unemployment rate till December 2017 and kept their GDP growth rate projections unchanged at 2.1% in 2017 and 2018 and 1.9% in 2019.
Federal Reserve Chair Janet Yellen said, “The simple message is that the economy is doing well,” adding that the Fed was maintaining its policy of gradual interest rate hikes. The decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy”, the central bank chief said.
After the announcement, the S&P 500 Index soared to its highest level this session and maintained its gains, but the US dollar plunged to its lowest since February 20 as a result of the Fed’s dovish projections. Wall Street is no longer wary of rate hikes as investors now regard the increases as proof of an economy strong enough to handle them.
In India, too, the announcement is likely to have a significant impact on markets on Thursday. The Bombay Stock Exchange Sensex and National Stock Exchange Nifty both ended flat on Tuesday, with investors awaiting the news of the Federal rate hike, after they had rallied on the back of the Assembly election results.