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fed rate decision


The European stock markets have surged after the Federal Reserve increased interest rates for the first time since 2006.

The main share indexes in France, the UK and Germany’s were all up by between 1% and 3% in morning trade.

The US central bank increased the range for its benchmark interest rate to between 0.25% and 0.5%, from the previous range of 0%-0.25%.

The Fed said the rise was part of a “gradual” process to get rates back to normal after years of being near zero.

“Considerable improvement” in the jobs market spurred the Fed into action.

London’s FTSE 100 rose 1.4% to 6,146.68, while Frankfurt’s Dax jumped more than 3% and the Cac 40 in Paris was 2.5% higher.

Photo Reuters

Photo Reuters

The European stock markets were following the lead given by markets in the US and Asia.

On Wall Street, the Dow Jones closed up 224.18 points, or 1.3%, at 17,749.09, while in Japan, the benchmark Nikkei 225 closed up 1.6% at 19,353.56.

After the Fed’s decision, the dollar rose against larger major currencies. Higher rates make the US a more attractive market for deposits, meaning demand for the dollar is likely to rise.

However, sterling recovered ground lost against the dollar and was 0.3% higher against the euro to €1.3783 after positive retail sales numbers for November.

At one point £1 bought almost $1.50.

British government-issued bonds, or gilts, rose in price following the Fed decision, meaning lower yields, or income.

Benchmark ten-year gilt yields fell 0.056 percentage points to 1.89%. While the specter of higher rates is often bad for existing debt prices, analysts said investors were pleased future Fed rate rises would be “gradual” in nature.

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.Fed interest rate decision December 2015

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.”