Reuters: The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signalling faith that the US economy had largely overcome the wounds of the 2007-2009 financial crisis.

The US central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25% and 0.50%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

“With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate,” Fed Chair Janet Yellen said in a press conference after the rate decision was announced. “The economic recovery has clearly come a long way.”

The Fed’s policy statement noted the ‘considerable improvement’ in the US labour market, where the unemployment rate has fallen to 5%, and said policymakers are “reasonably confident” inflation will rise over the medium term to the Fed’s 2% objective.

The central bank made clear the rate hike was a tentative beginning to a ‘gradual’ tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.

“The process is likely to proceed gradually,” Yellen said, a hint that further hikes will be slow in coming.

She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. “To keep the economy moving along the growth path it is on ... we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly.”

New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7% next year and economic growth hitting 2.4%.

The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth.

“The Fed is going out of its way to assure markets that, by embarking on a ‘gradual’ path, this will not be your traditional interest rate cycle,” said Mohamed El-Erian, chief economic advisor at Allianz.

Fed officials said they were confident the situation was ripe for them to make a historic turn in policy without much disruption to financial markets, which had expected the hike this week.

US stocks rallied on the news, in part because the Fed made clear it would proceed slowly with further tightening. Yields on US Treasuries rose, while the dollar was largely unchanged against a basket of currencies. Oil prices fell sharply before paring losses.

Policy still accommodative

Yellen on Wednesday said the Fed had no desire to curb consumers from spending or businesses from investing. She emphasised that interest rates remained low even after the rate hike, near levels economists regard as appropriate for a recession.

“Policy remains accommodative,” Yellen said. “The US economy has shown considerable strength. Domestic spending has continued to hold up.”

Fed policymakers’ median projected target interest rate for 2016 remained 1.375%, implying four quarter-point hikes next year. Based on short-term interest rate futures markets, traders expect the next rate hike in April.

A 9 December Reuters poll showed economists forecasting the federal funds rate to be 1.0% to 1.25% by the end of 2016 and 2.25% by the end of 2017.

The rate hike sets off an immediate test of new financial tools designed by the New York Fed for just this occasion, as well as a likely reshuffling of global capital as the reality of rising US rates sets in.

To edge the target rate from its current near-zero level to between 0.25% and 0.50%, the Fed said it would set the interest it pays banks on excess reserves at 0.50%, and would offer up to $ 2 trillion in reverse repurchase agreements, an aggressive figure that shows its resolve to pull rates higher.

The impact on business and household borrowing costs is unclear. One of the issues policymakers will watch closely in coming days is how long-term mortgage rates, consumer loans and other forms of credit react to the rate hike.

Asian stocks, dollar climb as Fed lifts off

Reuters: Asian stock markets jumped on Thursday as investors chose to take a historic hike in US interest rates as a mark of confidence in the world’s largest economy, lifting the dollar and piling on the pain for oil prices.

China also allowed its currency CNY=CFXS slip for a 10th straight session to hit its lowest since June 2011. The steady decline in turn puts pressure on other Asian currencies to depreciate to stay competitive.

The Federal Reserve’s 25-basis-point increase was almost a decade in the making and easily one of the most telegraphed in history. So there was some relief that, after months of waiting and several false starts, the move was finally done and dusted.

“The Fed will be absolutely delighted with the lack of volatility across all asset classes,” said Alan Ruskin, global head of forex at Deutsche.

“Nothing here to change a view that we can have a moderate ‘risk-positive rallyette’, even if the probability of a March hike is significantly higher than priced.”

Japan’s Nikkei added 2.4%, on top of Tuesday’s 2.6% advance. Australian stocks climbed 1.7%, while Shanghai put on 1.1%.

MSCI’s broadest index of Asia-Pacific shares outside Japan firmed 0.9%.

On Wall Street, the Dow .DJI ended Wednesday with gains of 1.28%, while the S&P 500 rose 1.45% and the Nasdaq 1.52%.

Markets were soothed by Fed Chair Janet Yellen’s assurance that future tightening would be ‘gradual’ and dependent on inflation finally moving higher as long forecasted.

The rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes pencilled in for next year and a terminal rate of 3.5%.

Fed fund futures dipped in response, yet the December 2016 contract implies a rate of only 0.83%, well below the 1.25 to 1.5% favoured by the central bank.

Moves in the Treasury market were also modest. While yields on two-year notes US2YT=RR hit their highest since April 2010, they were only up four basis points in all at 1.009%.

Still, that did widen the premium over German yields DE2YT=RR to 132 basis points, the fattest since late 2006 and a positive draw for the US dollar.

The dollar added 0.9% to 98.839 against a basket of major currencies, and looked set for another test of stiff resistance around the 100.00 mark.

The euro dropped to $ 1.0848 EUR= having fallen from $ 1.1000 in the wake of the Fed’s statement, while the dollar advanced to 122.57 yen JPY=.

Richard Franulovich, a currency strategist at Westpac, noted that historically the dollar tended to soften during the start of Fed tightening cycles. Yet he doubted it would last given most other major central banks were very much in easing mode.

“A follow-up Fed hike could come as soon as March, aided and abetted by favourable oil price base-effects that will lift inflation almost a percentage point and a potentially mild winter,” said Franulovich.

“We should see a resumption of the dollar’s longer term uptrend as 2016 progresses.”

Such an outcome would spell further trouble for commodities, making them more expensive when measured in other currencies.

Copper CMCU3 slipped 0.3% and is down 27% lower for the year so far.

Oil prices were subdued having resumed their decline on Wednesday to lose as much as 5% after US government data showed a big, surprise build in crude inventories.

Brent LCOc1 eased another 10 cents to $ 37.27 a barrel, after shedding $ 1.16 on Wednesday. US crude CLc1 inched up 2 cents to $ 35.54 but that followed a loss of 4.9% the day before.

Fed likely to raise rates 2-3 times next year - BlackRock chief strategist

Reuters: The U.S. Federal Reserve is likely to raise interest rates two or three times during 2016, BlackRock’s top investment strategist said on Thursday.

Russ Koesterich, BlackRock’s global chief investment strategist, told reporters during a Tokyo visit that the dollar is likely to strengthen against the euro and the yen, helping to support share prices in Europe and Japan. “We believe that the Fed would be gradual in terms of their tightening cycle,” said Koesterich, after the Fed hiked benchmark interest rates on Wednesday for the first time in nearly a decade.

He said he expected “some flattening” in the yield curve in the U.S.

“We think that long-term rates will be fairly constrained,” he said, adding that BlackRock’s year-end target for U.S. 10-year Treasuries is about 2.75%.  The benchmark 10-year Treasuries yield stood at 2.245% on Thursday.

“We do believe that the dollar will continue to appreciate against the euro and the yen, although probably more against the euro than against the yen,” said Koesterich, without giving specific targets.

Koesterich added that they see better valuations in European and Japanese equities, while taking a cautious stance towards U.S. stocks.

“We believe that Japanese equities will continue to rise. We think it is reasonably valued. We’re encouraged by improvements in corporate governance, earnings per share growth, higher ROE (return on equity).”

BlackRock is the world’s largest asset manager, managing $4.5 trillion globally at the end of September.