The US Federal Reserve has hiked interest rates for the first time in nine years, increasing rates by 25 basis points.
The Federal Open Market Committee decided to move rates up from the target rate of between 0 and 0.25 per cent, which it has been at since November 2008. The target main policy rate is now 0.25 to 0.5 per cent.
The markets reacted well to the move, with the S&P 500 jumping 1.45 per cent as the Federal Reserve made the announcement.
A statement from the FOMC said: “The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its two per cent objective.”
The 12 members of the committee voted unanimously for the hike.
The move was widely expected by markets, with experts saying it is a symbolic move rather than being likely to have a real impact on the economy.
Rowan Dartington Signature managing director Guy Stephens says: “It signals that the American economy has finally moved beyond the depths of the worst financial crisis since the great depression and into a period of sustained economic prosperity, or at least that’s the plan.
“Current projections suggest that the base rate will be around the 1.50 per cent mark by the end of next year, consistent with the view that the process will be slow and gradual.”
Ahead of the move, commentators said that most of the market impact was already priced in, with there being around an 80 per cent expectation of the raise going into the FOMC meeting.
Nutmeg chief investment officer Shaun Port says: “Tightening is a sign of healing. Healing balance sheets and rising nominal anchors such as wage growth and core inflation are all positive for equity assets, and detrimental for assets with fixed income components.”
With the Fed having begun it’s tightening programme, all eyes are now on Mark Carney and the Bank of England. It was previously expected that the UK would follow six to 12 months after the US, but that could be shifted forward.
Port add: “After the Fed lifts off and bond yields rise, the Bank of England will increasingly look embarrassingly behind the curve.
However, Hargreaves Lansdown head of research Mark Dampier believes that this does not necessarily mark the start of a hiking cycle for the US, instead thinking cuts could happen next year.
He says: “They may well have to bring them back down again, and I don’t think UK rates will go up in the next few years, they could even be cut.”