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December FOMC Meeting: Fed Hiked the Key Interest Rate by 0.25%

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Fed finally hikes interest rate by 0.25%

On December 16, 2015, the Federal Reserve announced the first interest rate hike in nearly a decade. The FOMC (Federal Open Market Committee) announced a hike of 0.25% to the key interest rate, bringing it to 0.5%.

The Federal Reserve’s statement after the rise suggested that the country’s economic activity has been expanding at a moderate pace. The committee felt there was a noticeable rise in labor activity. It expects inflation to rise to the target level of 2% in the medium term as the effect of declining energy prices dissipates.

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Fed delivers to meet market expectations

The Federal Reserve made a nearly unanimous decision to increase interest rates. The FOMC also continued its policy of reinvesting the principal payments on the Fed-held agency debt and other mortgage-backed securities. It expects to continue doing so until interest rates are normalized.

Markets remained relatively stable after the interest rate decision, as it was in line with the market expectations. The committee also released the new dot plot chart, which projected interest rates to range between 2%–4% in 2018. The focus shifted toward Fed chair Janet Yellen’s statement, which was scheduled 30 minutes after the rate decision.

Impact on the market

The PowerShares DB US Dollar Bullish ETF (UUP) fell by 0.36% on December 16, 2015, while the broad market SPDR S&P 500 ETF (SPY) rose by 1.2% after the FOMC statement release.

Banking stocks were trading on a positive note on December 16. JPMorgan Chase (JPM) and Citigroup (C) rose by 2.0% and 2.2%, respectively. Wells Fargo (WFC) also followed a similar trajectory and rose by 1.5% after the monetary policy release.

The next article focuses on how the US Dollar Index reacted to the Fed’s revised monetary policy and Yellen’s statements after the rate decision.

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