The Fed policymakers have been grappling with when and how to alter the policies put in place after the 2008 financial crisis to boost economic activity.
At the time, they cut interest rates and bought up US treasuries and mortgage-backed securities to keep rates low.
The Fed has a $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the financial crisis and recession.
On June 14, policymakers said they aim to reduce that balance sheet, by reinvesting payments from those securities only above certain caps, totaling $10 billion.
The cap would escalate in three month intervals. It would start implementing those policies this year, assuming economic growth continues.
Janet Yellen said she’s not sure how far the committee will want to reduce the holdings over the long run, but she said they would be levels “appreciably below” those seen in recent years though larger than before the financial crisis.
The Fed raised interest rates for the first time since the crisis in December 2015.
Policymakers acted in December 2016 and again in March.
The June 14 decision was made with an 8-1 vote, with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, dissenting. Neel Kashkari also voted against the March rise.
Interest rates remain low by historic standards. The board expects to raise rates at least three times this year.
The moves depend on the strength of the economy, which has been mixed.
On June 14, the US Labor Department reported that prices for goods excluding food and energy increased by 1.7% from May 2016, slowing steadily from earlier in the year.
That fell short of the Fed’s target of 2%.
Janet Yellen said the bank is aware of the shortfall and it was “essential” to move back to the target.
However, she said this year’s data may be skewed by one-off factors, such as lower prices on cell phone plans.
“It’s important not to overreact to a few readings,” she said.
“Data on inflation can be noisy.”
For US consumers, interest rate increases tend to lead to increased borrowing costs.
The Federal Reserve has announced it is raising interest rates by 0.25 percentage points.
This is the US rate’s first increase since 2006.
The move takes the range of rates banks offer to lend to each other overnight – the Federal Funds rate – to between 0.25% and 0.5%.
The move is likely to cause ripples around the world, and could increase pressure on the UK to raise rates.
It could also mean higher borrowing costs for developing economies, many of which are already seeing slow growth.
There are concerns that a rise will compound that slowdown, as higher rates in the US could strengthen the dollar, the currency in which many countries and companies borrow.
It puts US policy at odds with that in Europe, where even easier borrowing terms are being implemented.
The European Central Bank (ECB) earlier this month cut overnight deposit rates from minus 0.2% to minus 0.3% and extended a €60 billion stimulus program.
The US rate rise vote was unanimous.
The Fed also raised its projection for its economic growth next year slightly, from 2.3% to 2.4%.
That suggests the bank does not think the rate increase will damage growth. US share markets jumped in response.
The Dow Jones went from a 50-point rise to stand up 79 points at 17,612.79 – a 0.5% gain.
Rates in the US have been at near-zero since 2008.
The Fed cited as the reasons for its action increased household spending and investment by business, along with a continued low rate of inflation.
In its statement, the committee said: “The committee judges that there has been considerable improvements in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective.”
The Fed has said it will continue to monitor inflation and employment to determine if and when further rise are justified.
The Federal Reserve chairwoman, Janet Yellen, said the committee was confident the economy would “continue to strengthen” but it still has “room for improvement”.
Future action will depend on how the economy moves forward and will be gradual.
Janet Yellen acknowledged weakness remained in the labor market, particularly wage growth.
She warned that if the Fed had continued to delay a rate rise, it could have been forced to tighten monetary policy too quickly, something that could have led to another recession.
The Fed’s medium-term projection for the Federal Funds rate is 1.5% in 2016 and 2.5% in 2017.
The bank will not get close to normal levels of around 3.5% until 2018 when it expects the economy will be back on a solid track.
“Were the economy to disappoint, the Federal Funds rate would likely rise more slowly,” said Janet Yellen.
Janet Yellen gave little clues as to the timing of the next move, saying: “I’m not going to give you a simple formula for what we need to raise rates again.”
Shares and bond markets have climbed on what is expected to be the first rise in US interest rates in nearly a decade.
The Federal Reserve is expected to announce the start of the gradual rate rise process at 19:00 GMT.
US markets opened higher, but lost ground as oil prices slumped.
A US rate rise would have global repercussions, and could adversely affect emerging economies, experts say.
The Fed is expected to raise its benchmark overnight interest rate from near zero, encouraged by a strengthening US labor market.
Analysts have been speculating for months as to when the first rise might be, with global stock markets rising and falling as Fed rate meetings come and go.
Low interest rates have generally been helpful for stock market investors, but Fed officials have indicated the likely decision in advance, removing some of the uncertainty that investors dislike.
In London, the FTSE 100 gained 0.72% by the close of the market. Paris and Frankfurt markets made smaller gains.
Many Asian markets closed significantly higher – Japan’s Nikkei 225 gained 2.6%, and Hong Kong’s Hang Seng rebounded, rising 2%.
Markets have already priced in a US rate rise, but investors will also be looking at the Fed’s announcement to gauge the likely path of future rate rises, analysts said.
The prospect of gradual rises could bring some stability to markets, but if the Fed were to raise rates more quickly, markets may take fright, analysts said.
The World Bank warned in September that a US rate rise could increase the risks to emerging economies caused by disruptions to capital flows.
With the US offering better returns, investors may decide to move money out of emerging economies.
Foreign governments could also have to pay more for debt issued in US dollars.
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