U.S. Fed raises key interest rate for first time in 9 years

WASHINGTON -- The U.S. Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans.

See Full Article

The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.

Wednesday's action signalled the central bank's belief that the economy has finally regained enough strength 6 1/2 years after the Great Recession ended to withstand modestly higher borrowing rates.

"The Fed's decision today reflects our confidence in the U.S. economy," Chair Janet Yellen said at a news conference.

The Fed said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 per cent to 0.5 per cent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed's statement suggested that rates would remain historically low well into the future, saying it expects "only gradual increases."

"The Fed reaffirmed that the pace of rate hikes would be slow," James Marple, senior economist at TD Economics wrote in a research note. "The Fed's expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook."

Stocks closed up sharply higher. The Dow Jones industrial average, which had been up modestly before the announcement, gained 224 points, or 1.3 per cent, for the day.

The bond market didn't react much. The yield on the 10-year Treasury note rose slightly to 2.29 per cent.

Rates on mortgages and car loans aren't expected to rise much soon. The Fed's benchmark rate doesn't directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys.

But rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed's rate hikes remain modest.

Shortly after the Fed's announcement, major banks began announcing that they were raising their prime lending rate from 3.25 per cent to 3.50 per cent. The prime rate is a benchmark for some types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike.

Among other things, the Fed's low-interest rate policies have helped jump-start auto sales, which are on track to reach a record 17.5 million this year. And the Fed's first hike may not slow them.

Steven Szakaly, chief economist for the National Automobile Dealers Association, says dealers will press financing companies to keep loan rates low. And competition for buyers will spur them to take other steps to hold down rates, such as accepting lower profits.

"The rate squeeze will happen between the dealer and its finance company rather than the dealer and the consumers," Szakaly said. "Consumers won't even feel it."

For months, Yellen and other Fed officials have said they expected any rate hikes to be small and gradual. But nervous investors have been looking for further assurances.

Yellen indicated that Wednesday's rate hike was partially defensive. If rates stayed at near zero, the Fed might not have the tools to combat a recession.

"We've worried about the fact that with interest rates at zero, we have less scope to respond to negative shocks," she said at her news conference.

When growth struggles, the Fed often cuts rates to help increase the amount of cash flowing through the economy. But by staying close to zero, the Fed would be unable to cut rates or it would be forced to have negative rates for the first time in its history.

An updated economic forecast released with the policy statement showed that Fed officials predict that their target for the federal funds rate -- the rate that banks charge on overnight loans -- will end next year slightly above 1 per cent. That is in line with the consensus view of economists.

The Fed's action was approved by a unanimous vote of 10-0, giving Yellen a victory in achieving consensus.

The statement struck a generally more upbeat tone in its assessment of the economy. It cited "considerable improvement" in the job market. And it expressed more confidence that inflation, which has been running well below the Fed's 2 per cent target, would begin rising. It suggested this would happen as the effects of declines in energy and import prices fade and the job market strengthens further.

In addition to the funds rate, the Fed is raising three other rates: It lifted the interest it pays on the reserves that banks hold at the Fed to 0.5 per cent from 0.25 per cent. It raised the rate it pays on a type of short-term loan to 0.25 per cent from 0.05 per cent. The Fed plans to use those two rates to help meet its new higher target for the funds rate.

In addition, it announced a quarter-point increase in its discount borrowing rate to 1 per cent from 0.75 per cent. This is the rate banks pay when they borrow emergency loans from the central bank. This rate typically moves up in conjunction with the Fed's benchmark rate.

------

AP Business Writers Paul Wiseman and Josh Boak in Washington and Tom Krisher in Detroit contributed to this report.



Advertisements

Latest Economic News

  • Canadian court approves bid for Trump tower in Toronto

    Economic CTV News
    TORONTO -- A Canadian judge on Thursday approved the sale of the Donald Trump-branded Toronto hotel and condo tower to its main debt holder after no other bids were submitted for the troubled building. Justice GlennHainey of the Ontario Superior Court of Justice approved the $298 million Canadian (US$223 million) "stalking horse" bid from San Diego investment firm JCF Capital ULC. Source
  • Trudeau defends Bombardier aid after executive compensation rose last year

    Economic CTV News
    BRAMPTON, Ont. -- Prime Minister Justin Trudeau is defending his government's decision to provide federal assistance to Bombardier after the company's senior executives saw their compensation rise by nearly 50 per cent last year. After touring a Magna auto parts facility in Brampton, Ont. Source
  • GDP numbers Friday expected to show economy started 2017 strong

    Economic CBC News
    Some economists are revising their forecasts upward for Canadian first-quarter gross domestic product growth, ahead of the Friday release of figures for January. The market consensus for January calls for a growth rate of 0.3 per cent, which would match the December report. Source
  • Brad Wall to meet with Trump cabinet members when he heads to Washington

    Economic CTV News
    REGINA -- Saskatchewan Premier Brad Wall says he has landed meetings with two members of Donald Trump's cabinet next week, including the president's point man on NAFTA. Wall is scheduled to be in Washington and says he will sit down with Secretary of Energy Rick Perry and Secretary of Commerce Wilbur Ross, the man tapped by Trump to deliver on a promise to renegotiate the North American Free Trade Agreement. Source
  • Alberta premier checking to see if Saskatchewan's Wall breaking free-trade deal

    Economic CTV News
    RED DEER, Alta. -- Alberta Premier Rachel Notley says she is looking at whether Saskatchewan's Brad Wall is breaking regional free-trade rules by offering incentives for oil and gas firms to move to his province. Source
  • McDonald's opts for fresh beef, not frozen, for some burgers soon

    Economic CBC News
    Coming soon to McDonald's: Fresh beef. The fast food giant said Thursday that it will swap frozen beef patties for fresh ones in its Quarter Pounder burgers by sometime next year at most of its U.S. Source
  • Environmental groups challenge Keystone XL pipeline approval

    Economic CBC News
    A coalition of environmental groups challenged the U.S. federal permit for the Keystone XL oil pipeline in court on Thursday because they say additional environmental scrutiny is needed. The Sierra Club, Natural Resources Defense Council and other groups say the initial environmental review completed in 2014 is inadequate and outdated, and that it underestimated how much the pipeline would encourage tar sands oil production in Canada. Source
  • Cenovus shares fall in wake of $17.7B oilsands purchase

    Economic CBC News
    Shares in Cenovus Energy were down 11 per cent shortly after markets opened Thursday following its announcement to acquire Canadian assets belonging to Houston-based ConocoPhillips.Cenovus Energy buying most of ConocoPhillips' Canadian assets for $17.7BUnder the $17.7 billion deal, the Calgary-based energy company would take over most of ConocoPhillips's investments in Canada in what is the latest mega oilsands sale by a major foreign oil and gas producer. Source
  • Is Toronto's housing market in a bubble? Not quite, analyst says

    Economic CTV News
    Despite a recent declaration by Bank of Montreal Chief Economist Douglas Porter that Toronto’s red-hot housing market is indeed in a “bubble,” other economists have been hesitant to use the controversial label to describe the city’s current real estate boom. Source
  • CIBC boosts takeover offer for PrivateBancorp to more than $6B

    Economic CBC News
    Shares of Canadian Imperial Bank of Commerce traded lower Thursday after the bank boosted its takeover bid for PrivateBancorp by 20 per cent. Under the terms of a new takeover agreement that has approved by the boards of directors of both firms, the deal values Chicago-based PrivateBancorp at approximately $6.6 billion Cdn, or $60.92 US per share, Source