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Fed finally exits zero-rate policy, hikes rate by 25 bps

Ending months of speculation, and for the first time in nearly a decade, the US Federal Reserve’s rate-setting Federal Open Market Committee (FOMC) raised its Federal Funds Rate by 25 basis points from the 0-0.25 percent range to a target of 0.25-0.5 percent.

The historical move, anticipated for over a year, marks the exit of the zero interest rate policy, which had been into place in the wake of the financial crisis of 2008.

The decision comes on the back of some particularly strong macroeconomic data emerging out of the world’s largest economy: the unemployment rate recently hit a seven-year low while jobs growth, too, has been steady.

Today’s decision, however, would likely not have been easy for Fed chair Janet Yellen, given the backdrop of slow growth globally, which is reflecting in the ongoing commodity slump, the worst since the 2008 crisis.

The post- meeting statement said: “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

“However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” it added.

The statement further said: “The committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.”

While analysts largely believe most markets will likely take the Fed hike in their stride and have already discounted the event, some have warned about an adverse impact on vulnerable emerging market currencies and equities and some parts of the global high-yield bond market.

Experts, however, say that more than today’s rate hike, the Fed’s monetary policy course through the next year will be more important — in that, how many, if any, further rate hikes can be expected in 2016.

They add that the central bank will have to do a tightrope act so as to not upset the global growth applecart while exiting its ultra loose monetary policy stance.

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