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US Fed signals faith in economy with first interest hike in 10 years

Global equity markets rallied in volatile trade while the dollar and US Treasury yields rose yesterday after the US Federal Reserve announced it would raise interest rates for the first time in nearly a decade.

The US 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 per cent and 0.50 per cent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

“They are telling you what they are going to do in the next year, which is to investors’ delight,” said Michael Marrale, head of research, sales and trading at ITG in New York.

“Stocks are really the only place to go...It adds certainty to the picture and that’s what investors crave more than anything.”

The Dow Jones industrial average rose 76.83 points, or 0.44 percent, to 17,601.74, the S&P 500 gained 11.2 points, or 0.55 per cent, to 2,054.61 and the Nasdaq Composite added 24.51 points, or 0.49 percent, to 5,019.87.

MSCI's all-country world index rose 0.8 per cent, while the pan-European FTSEurofirst 300 index closed up 0.3 per cent after a 2.9-per cent rally in the prior session.

The dollar index, which measures the greenback against a basket of other major currencies, shed 0.06 percent at 98.157. The euro edged up 0.05 per cent at $1.0933.

Benchmark 10-year Treasury notes fell 3/32 in price to yield 2.2747 per cent.

The yields on two-year Treasuries climbed to 1.021 per cent, the highest since April 2010 and were last at 0.9802 per cent.

The interest rate hike signalled faith that the US economy had largely overcome the wounds of the 2007-2009 financial crisis.

The US central bank’s policy-setting 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 2 per cent 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 per cent, 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.”

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