(Kitco News) - In line with heightened expectations, the Federal Reserve has raised interest rates by 25 basis points, bringing the Fed Funds rate to a range between 0.50% and 0.25%.
This is the first time the U.S. central bank has hiked rates since June 2006; the move was almost universally expected by economists and market participants.
The historic rate hike comes as the committee appears to be more optimistic on the U.S. labor market, noting that continued improvement "confirms that underutilization of labor resources has diminished appreciably since early this year."
Gold pared its gains slightly after the Fed announcement. As of 2:10 p.m. EST, Comex February gold was up $5.6 for the day to $1,066.90 an ounce. Roughly five minutes ahead of the Fed decision, the contract was trading at $1,069.30 an ounce.
March silver was up 32 cents to $14.09. This contract was trading at $14.12 ahead of time.
The euro was at $1.09034 after trading at $1.09573 prior to the Fed announcement.
The committee's economic outlook in the statement was relatively unchanged from October as the central bank sees the country's economic activity expanding at a "moderate pace."
"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," the statement said.
Although the Fed has embarked on a new rate-hike cycle, the committee has provided no further guidance on the next expected rate hike.
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal 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," the statement said.The central banks' interest rate expectations, are only slightly adjusted. The average among the committee sees the Fed-fund rate at 0.4% in 2015, unchanged from September. The committee is forecasting rates to jump to 1.4% also unchanged; however, in 2017, the committee expects to see rates at 2.4%, down from the previous estimates at 2.6% For 2018, the committee members expect an interest rate of 3.3%, down slightly from September’s forecast of 3.4%.
According to the central bank's economic outlook, it expects U.S. gross domestic product to expand on average 2.1%, unchanged from September's projection of 2.1% growth. For 2016, the central bank expects the economy to grow 2.4% up from the previous forecast of 2.3%. For 2017 is expected to see economic growth of 2.2%, unchanged from September. Looking farther out, for 2018, the central bank expects the U.S. economy to grow by 2.0%, unchanged from the previous estimate.
The Fed also only slightly adjusted their outlook for U.S. unemployment rate, expecting to see it at to 5.0%, unchanged from September's. The committee’s forecasts for 2016 was lowered to 4.7%, compared to September's expectations of 4.8%; 2017 forecasts were also modified with the central bank expecting an unemployment rate of 4.7%, down from the previous forecast of 4.8. For 2018, the bank expects the unemployment rate to come in at 4.7%, down from the previous forecast of 4.8%.
The Fed is also relatively unchanged in its inflation outlook, with its forecast for personal consumption expenditures (PCE) to come in at to 0.4% this year. There was only a slight adjustment to the 2016 forecast as the Fed sees inflation at 1.6%compared to the previous forecast of 1.7%. The Fed's 2017 outlook see inflation at 1.9%, unchanged from the previous forecast. The central bank is expecting inflation to hit 2.0% by 2018, unchanged from September.
Core inflation expectations, which strip out volatile food and energy prices, were slightly lower. For this year, the Fed expects core PCE to come in at 1.3%, down from the previous report of 1.4%. The 2016 estimates were only adjusted with a forecast of 1.6%, down from September’s forecast of 1.7%. The 2017 estimates was unchanged at 1.9%. The central bank is not expecting to hit its inflation target of 2.0% until 2018, unchanged from the previous outlook.
Avery Shenfeld, senior economist at CIBC World Markets, said that despite the "well telegraphed move." the Fed has managed to keep the outcome of future rate hikes in question, which is creating some uncertainty in the marketplace.
"At first blush, this isn’t quite as dovish an outcome as some might have expected given the unanimous vote and the lack of any downward move in the 2016 dot plot, but there’s enough doubt about the pace of future tightening to keep market responses muted for now," he said.
By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C
