Fed raises interest rate after seven years
The Federal Reserve is modestly raising interest rates after seven years of record lows, signaling further hikes will likely be made slowly as the economy strengthens and inflation rises.
The Fed moved to lift its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent, ending a period of near-zero rates that began during the 2008 financial crisis.
Kevin Smith, executive vice president with Janney Montgomery Scott in North York, said the hike was in line with market expectations, and he noticed the stock market already responding positively to the news, with the Dow Jones up 100 points shortly after the announcement Wednesday afternoon.
"The real indicator is going to be how the market performs the remainder of the week," he said.
Smith said the Fed's delay in raising the rate, which had been previously anticipated in September, was hurting the market due to uncertainty and had sedated stock market growth that typically is associated with December, known as the "Santa Claus rally."
The Fed’s action reflects its belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand higher borrowing rates, according to the Associated Press. But the statement announcing the rate hike said the committee expects “only gradual increases” in rates going forward.
Smith said this represents what is known as a "dovish" approach by the Fed, which means the expectation for future increases will be limited. This approach is what financial advisers were expecting and hoping for, he added.
One group that stands to see negative returns from the hike are major manufacturing exporters, according to Tom Palisin, executive director of The Manufacturers' Association of South Central Pennsylvania.
The rate increase, though gradual, may make the U.S. dollar stronger, thus making American products more expensive overseas.
"This (increase) has been telegraphed for while, though," Palisin said. "Hopefully, companies have accounted for this."
The Associates Press contributed to this report.
Reach David Weissman at email@example.com.