US Federal Reserve raises interest rates for first time since 2006: live

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Federal Reserve raises interest rates for first time since 2006
Decision was unanimous
Fed policymakers signal four rate hikes in 2016
• Janet Yellen press conference at 7.30pm

Latest

19:36

Yellen on employment, wages and exports

Fed's Yellen: Wage growth needs to show pickup; participation still below trend

— Live Squawk (@livesquawk)
December 16, 2015

Fed's Yellen says that good progress has been made on jobs, economy is doing well, hike recognises this

— Live Squawk (@livesquawk)
December 16, 2015

Fed's Yellen says exports subdued by weaker global environment and strong dollar; spending expansion has offset this

— Live Squawk (@livesquawk)
December 16, 2015

19:32

Yellen: interest rate rise "marks end of an extraordinary seven year period"

Yellen begins her opening statement. She says today's rate hike "marks the end of an extraordinary seven year period" where the world experienced the "worst financial crisis and recession since the Great Depression".
The Fed's actions have helped with the process of "restoring jobs, raising incomes and easing the economic hardship of millions of Americans".
The recovery has come "a long way", she says, but is "still not complete". Inflation is still low, and there is still room for the labour market to improve.

Members felt that a modest increase was now "appropriate" .yellen stresses that even after this increase, monetary policy will remain "accomodative" and policymakers will "proceed gradually"

19.29

Janet Yellen press conference is about to start

You can follow it live here.

19:25

US stocks have jumped

19:20

Fed removes reverse repo cap to ensure control over rates

Policymakers have raised the reverse repo rate to 0.25pc, from 0.05pc and removed a $300bn daily limit on borrowings. Analysts had expected the Fed to double the cap, not remove it.

19:14

Reaction to rate rise

Here's what Group Business Editor Ben Wright thought of it all:

19:12

Fed lifts growth forecasts, nudges down rate path

The new economic projections are in. Fed policymakers now expect growth of 2.1pc this year – unchanged from their September estimate. Growth in 2016 is expected to be 2.4pc, slightly higher than the previous forecast of 2.3pc.
The unemployment rate is expected to remain at its current level of 5pc this year, and fall to 4.7pc in 2016. Policymakers also lowered their estimate of the natural rate of unemployment to a range of 4.8pc to 5pc, from 4.9pc to 5.2pc.
Now for the all important dot plot. This chart shows how policymakers expect rates to rise (each dot is a policymaker):

This is what they expected in September:

Translation: Policymakers still expect four rate hikes next year. They have slightly lowered their projections over the next two years, although the median projection of the "long run" rate remains at 3.5pc.

19:04

Fed policymakers see "only gradual" rate increases

As expected, policymakers have stressed that future increases will be slow, with "gradual adjustments" expected to help the economy. Here's more from the statement policymakers released:
QuoteInformation received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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. Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

19:01

Federal Reserve policymakers voted unanimously to raise rates

All ten FOMC members voted to tighten policy.

19:00

BREAKING: Federal Reserve policymakers vote to raise rates for the first time since 2006

The benchmark Federal Funds Rate has been raised to 0.25 to 0.5pc, from a previous target of 0 to 0.25pc.

18:45

Yellen has been worried about "loss of credibility for policy" in the past

With 15 minutes to go until possible lift-off, here's a reminder of what Yellen said when the Fed last raised rates in the summer of 2006:

Here's what Janet Yellen said the last time the Fed raised interest rates, in June 2006 https://t.co/qZdSmdpy9S pic.twitter.com/ZixG7IBH1l

— Ben Leubsdorf (@BenLeubsdorf)
December 15, 2015

18:24

Should the Fed raise rates?

We all think they will, but with inflation still far away from the Fed's 2pc target, is now the right time to raise rates? Vote in our poll.

18:18

A reminder of past Fed tightening cycles…

US Fed rate tightenings since 1983. pic.twitter.com/LdpsIF05F6

— RBS Economics (@RBS_Economics)
December 16, 2015

18:07

Is a rate hike written in the stars?

With less than an hour to go, what do the nation's finest horoscope writers recommend for Janet Yellen, the Fed's chairman?

Are the planets aligned correctly for the central bank to safely take its first steps away from close to zero interest rates?

The Daily Mail

Quote 'All's well that ends well.' So the saying goes. But how can we be sure whether a process has ended well? Ought we not to be nervous, lest the desired outcome is merely the first stage in a chain of events that lead to further less-desirable developments?

Don't waste too much of this precious Wednesday wondering whether this will go wrong or that will lead to trouble. Just be willing to accept that what appears to have been a satisfactory occurrence will yet stand up well to close scrutiny and the test of time.

The Daily Star

Quote Agreements, contracts, consent? Be sure you know the terms before you commit to a certain course of action. Don’t leave any room for doubt. Work on a hunch where a certain situation has got stuck in a rut and by this evening you’ll have found a way to jolt it out of its groove.

The Daily Mirror

Quote People are impressed with your talents. Compliments from someone you have always admired will bolster your confidence. Sharing ideas prompts you to start a new creative project with an imaginative friend. They know how to keep your aims and ambitions on the boil. It is time to put your imagination to work.

17:59

Bank of England to delay even after US rate hike?

While markets currently believe the Bank of England will leave interest rates on hold until January 2017 – a whole year after the Fed is expected to tighten, Samuel Tombs, chief economist at Pantheon Macroeconomics, highlights that the central banks often move within a few months of each other (with the BoE usually following the Fed):

Bold call by markets that UK MPC will hike c.1yr after the #Fed. Rate cycle lagged by ave. of just 5m in last 30yrs: pic.twitter.com/HBNo0Aexrl

— Samuel Tombs (@samueltombs)
December 16, 2015

17.50

Lifting the reverse repo cap

The Fed has been road testing its reverse repo facility for more than two years. The facility currently has a cap of $300bn. According to Marc Ostwald at ADM investor services international, actual take-up has averaged $110bn a day.

Economists expect the cap to be "at least doubled" to provide enough headroom to meet demand. Bank of America Merrill Lynch believes demand will initially total $200bn to $300bn. In a note, Mark Cabana, rates strategist, said:

Quote A cap at the high end of this range (or even above it) would demonstrate a strong commitment from the Fed to raise short- term interest rates. We think the Fed will prefer to set the cap at a higher level and gradually reduce it over time after it sees where the typical demand settles. Along with an increase in the aggregate cap, we would not be surprised to see the Fed increase the per-counterparty cap from $30bn to potentially as high as $50bn.

Mr Ostwald adds:

Quote The question is whether this can in reality drive up market rates to the new target range; much will eminently depend on how much demand there is from money market funds, who remain hungry for interest income.
Yellen is among the Fed officials who have admitted that its size will be “elevated” when rates do begin to rise. The FOMC could also opt for the unlimited "full allotment" route, putting absolutely no limit on the RRP facility.

But there are dangers to doing this. Joseph Abate, a Barclays analyst, said that the Fed already wants to reduce its footprint in markets, particularly among the kinds of flight prone money market fund (MMF) investors included in its RRP scheme. He said:

Quote During a financial crisis you might actually amplify the crisis by MMFs pushing all their cash towards [the safe haven of] RRP, in effect defunding everyone else.

Photo: Jay Mallin/Bloomberg News

17:40

Delving into the Fed's new toolkit

̶W̶h̶e̶n̶ If the Fed decides to raise interest rates tonight, policymakers are also likely to adjust a number of other items its monetary policy toolkit.
The Fed's main tool is Federal Funds Rate (FFR). The target currently stands at 0 – 0.25pc and is expected to be raised to 0.25pc to 0.5pc tonight.
In normal times, the Fed would increase the FFR by selling securities to banks to shrink cash reserves. This in turn raises the cost of borrowing.
But these aren't normal times. There is a lot of cash washing around the system – $2.6 trillion of the stuff to be exact:
Instead, it has set the funds rate in recent years by paying banks 0.25pc interest to park excess reserves at the Fed. In theory, banks shouldn't lend at a rate below this risk-free deposit rate.
However, it hasn't always worked. This is because a.) there's lots of money sloshing around and b.) not everyone is allowed to park their cash at the Fed. Money market funds and government-sponsored enterprises, for example, are excluded. This means money market rates often trade below the 0.25pc interest rate on excess reserves.
Photo: BoAML

Enter the overnight reverse repo facility (stay with me, I'll try to make it worth your while). This tool gives a whole range of counterparties, including money market mutual funds, the chance to buy risk-free securities from the Fed for a day at an interest rate of 0.05pc. They should have no reason to lend below that rate.
So by lifting the excess reserves AND repo rates, to expected rates of 0.5pc and 0.25pc, the Fed should be able to steer interest rates to within the higher FFR band.
If you're more confused than enlightened then watch this video by the Wall Street Journal, which uses lifts and buildings to explain the whole process, and why it matters.

16:45

European markets close slightly higher

Following this morning's rally, European stock markets have lost some of their gains. The FTSE 100 in London closed up 0.7pc at 6,061.19, while the CAC 40 in Paris finished up 0.3pc, the DAX 30 in Frankfurt closed up 0.16pc.

16:17

Fed to release new forecasts

Policymakers will also release their projections for growth, unemployment and interest rates.
They currently expect growth of 2.1pc this year and 2.3pc in 2016. September's forecasts show the unemployment rate is expected to remain at its current level of 5pc this year, and fall to 4.8pc in 2016. According to the projections, the jobless rate is already within the 4.9pc to 5.2pc range the Fed considers to be the "natural" or non-inflationary rate.
But all eyes will be on policymakers' expectations for interest rates. Here's what they look like at the moment:

Each dot represents a member of the FOMC (voting or not). The dots are anonymous, although sometimes you can guess who they represent. The chart above shows one Fed rate setter believes interest rates will dip into negative territory this year and next.
Experts assume this is Minneapolis Fed president and arch-dove Narayana Kocherlakota, who steps down next year. Most economists expect policymakers to predict a slightly shallower path of interest rates.

15:56

Rate rises: then and now

A quicker reminder of what the US economy looked like when the Fed last raised interest rates, courtesy of the economics team at RBS:

The last time the #Fed raised rates growth was slower, unemployment was lower and there was inflation. pic.twitter.com/XLtlnoTLtF

— RBS Economics (@RBS_Economics)
December 15, 2015

15:50

Majority of economists expect a rate rise today

…102 out of 105 to be exact.

Out of 105 economists surveyed by Bloomberg, 3 don't expect to see a hike today.

— Joseph Weisenthal (@TheStalwart)
December 16, 2015

Just in case you're curious, the three outliers are Mikhail Melnik at Kennesaw State University, Steve Latin-Kasper at NTEA and Steve Ricchiuto at Mizuho Securities.
"There is no acceleration in underlying economic activity," Ricchiuto told CNBC earlier this year. You can hear more of his glass half-empty outlook in the above video.

15:32

Recent Federal Reserve policymaker comments

Yellen said this month that the US economy had “recovered substantially since the Great Recession”, with the current rate of growth “sufficient enough” to steer the labour market towards full employment and push inflation back to the Fed’s 2pc target. She also warned about the dangers of waiting too long to raise rates. Here's a reminder of what she said on December 3:
QuoteWere the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.
Janet Yellen is the chairman if the Federal Reserve

One voting member of the FOMC is already calling for higher rates. Here's what Jeffrey Lacker, president of the Richmond Fed, said at the end of November:

Quote It does seem now that job market conditions continue to improve at a very healthy clip. I think the employment report for October is what, in the minds of many observers, has sealed the case for a rate increase. Of course, a lot can happen between now and then, and there is some more data to come in, but I think the case has been strengthened since September.

Some remain cautious. Board member Lael Brainard is one of them. She recently stressed why the next tightening cycle was likely to be shallower than previous ones:
QuoteThe lower neutral rate means the normalisation of the federal funds rate is likely to follow a more gradual and shallower path than in previous cycles, although the actual path will be determined by economic conditions. It also implies that the likelihood of the federal funds rate hitting the zero lower bound will be persistently greater than it has been previously, which could make it more difficult to achieve our objectives of full employment and 2pc inflation.

15:08

Fed policymakers deliberating decision now

Voting members of the Fed are debating whether to raise rates right now. Most – including Yellen, have already prepared the ground for an increase this month, and markets believe there is a 76pc chance of a hike today. Here's a little bit more about the Federal Open Market Committee (FOMC) that sets rates:

15:00

Federal Reserve policymakers expected to raise interest rates for first time since 2006

Good afternoon and welcome to our live coverage of the Federal Reserve's December interest rate meeting.

So. We're finally here. It's been almost ten years since the world's biggest central bank raised interest rates, but today, Janet Yellen is expected to announce the process of tightening is underway. Follow us for live coverage of the decision at 7pm, when policymakers willand Yellen's press conference at 7.30pm.