The Fed Issues First Interest Rate Hike Under Trump

The Fed Issues First Interest Rate Hike Under Trump

Stock prices are rising and bond yields are falling as traders react to the Federal Reserve's plans to raise interest rates at a gradual pace this year.

The increase, which was anticipated, sent stock markets in Toronto and NY higher.

Despite Wednesday's Federal Reserve rate hike, interest rates still don't match the U.S.' economic performance, and that means there could be danger ahead, expert David Kelly told CNBC. It had been up through the day, and gains accelerated immediately after the Fed made its announcement.

"They do not have as much room to be patient as they did before", said Tim Duy, an economics professor at the University of OR, who expects Fed policymakers to lift their rate forecasts this week.

Kocherlakota was also well-known for a sharp shift in his views. Minneapolis Fed President Neel Kashkari cast the only dissenting vote, saying he preferred to stand pat.

Yellen announced last December that the Fed chose to "raise the target range for the federal funds rate to 1/2 to 3/4 percent", in light of what it viewed as a strengthening economy. Previously, the key interest rate was raised in December 2015 for the first time since the financial crisis.

Markets have been expecting a March rate hike for a long time, the expectations have been largely priced in since February. This would represent moderate acceleration from 2015 and 2016, which saw one hike each. The price index of personal consumption expenditures (PCE) jumped by 0.4 percent in January, showing a 1.9-percent increase for the last 12 months and thus approaching the central bank's own long-term inflation target of 2.0 percent for the first time in almost five years.

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The move hardly comes as a surprise after Fed officials including Chair Janet Yellen foreshadowed a rate hike in speeches about two weeks ago.

Interest rates have been historically low since the Fed began cutting rates in 2007, as the financial crisis began.

There was not much change in economic forecasts from the Fed's December meeting either, with unemployment, inflation and federal funds median forecasts unchanged from December.

Investors are concerned about the effect higher interest rates will have on economic growth but recently have been betting on a potential boost from President Donald Trump's proposed fiscal policies.

The increase - 25 basis points to a range of 0.75%-1% - is based on the committee's belief that the economy is recovering, the labor market is improving and inflation will increase.

At 9:37 a.m. ET (1337 GMT) the Dow Jones industrial average was down 26.64 points, or 0.13 percent, at 20,854.84, the S&P 500 was down 6.51 points, or 0.27 percent, at 2,366.96.