Fed raises interest rates for first time in a decade in ‘dovish hike’

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

The U.S. 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 percent and 0.50 percent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

“The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise over the medium term to its 2 percent objective,” the Fed said in its policy statement, which was adopted unanimously.

The Fed made clear that 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. 

“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the Fed said.

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

The statement and its promise of a gradual path represents a compromise between those who have been ready to raise rates for months and those who feel the economy is still at risk.

“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.

The dollar firmed modestly after the rate rise. Based on interest rate futures markets, traders expected a second hike in April.

The median projected target interest rate for 2016 remained 1.375 percent, implying four quarter-point rate hikes next year.

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

Financial markets had expected the rate hike, bolstered by recent U.S. data showing job growth continuing at a strong pace.

A Dec. 9 Reuters poll showed the likelihood of a hike on Wednesday was 90 percent, with economists forecasting the federal funds rate to be 1.0 percent to 1.25 percent by the end of 2016 and 2.25 percent 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 U.S. rates sets in.

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 a rate hike meant not to slow an economic recovery but nurse monetary policy back to a more normal footing.

The Fed emphasized it would move gingerly into its tightening cycle. That was enough to produce a unanimous vote on the policy-setting Federal Open Market Committee, as even members who had argued publicly for delaying a rate hike delay went along with Fed Chair Janet Yellen and other policymakers.

Yellen is scheduled to hold a press conference at 2:30 p.m. EST.

South Seas Seder

Namotu is a little speck of an atoll barely three acres in
area, about the size of a typical shopping center. It’s part of the South
Pacific island nation of Fiji, and it’s where my group of surfing lawyers
decided to spend our annual legal seminar/surf trip last year.

As the date for the trip approached, I realized that I would
be away from my family for Passover. Having never missed a family seder in my
life, I began having second and third thoughts. I sent an e-mail to my fellow
travelers, asking if anyone would be interested in participating in a seder
while in Fiji. Many replied that they would.

On the day preceding Passover on Namotu, I posted a notice
on a well-worn bulletin board: “Passover seder tonight.” I figured about 20 of the
25 individuals in our group were Jewish and they would be attending.

That afternoon, I was approached by a Fijian man. He saw the
notice and wanted to talk to me. He explained that many Fijians were devout
Methodists, having only within the last 100 years given up their previous
religious belief and the practice of cannibalism. They were very interested in
the Passover experience and were themselves preparing for Good Friday and
Easter Sunday observances.

The locals were expecting their annual visit from the
minister and informed him by radio of the seder. He asked the Fijians to ask me
if I could spare any matzahs for use in their observance as the sacrament. I
told him of course, and I would consider it an honor if any of the Fijians
would like to attend the seder.

As the time for the seder approached, the small boats began
to arrive. The native women were attired in their finest dresses, with their
black hair exotically done. The men, who usually wore shorts and T-shirts,
showed up in their finest shirts and sarongs.

The tables were beautifully set — outdoors, under the night
sky — with the finest linens, napkins and china. Where such things came from, I
had no idea. The haggadahs and kippot were distributed and the seder began. As
the readings progressed around the table, I thought of my family, friends and
past seders. They were all memorable, all special, but this night was truly
different from all other seder nights.

One of our boatmen, Wonga, stood at the table wearing his
finest flowered sarong and white shirt. With kippah in place, he held up the matzahs.
He pronounced in halting English, “Lo, this is the bread of affliction.”

I glowed.

Everyone enjoyed themselves and talked about the seder for
many days afterward. The natives told me this was probably the first seder in Fiji
— or certainly on Namotu — and they wouldn’t forget it.