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US Federal Reserve raises benchmark rate by a quarter point

The US central bank has raised its federal funds rate by a quarter point, ending almost a decade of ultra-cheap monetary policy. The Federal Reserve indicated more rate increases were likely to follow soon.

The US Federal Reserve on Wednesday decided to hike its benchmark federal funds rate by a quarter percent, or 25 basis points, moving the central bank's target rate from the zero lower bound to a range of between 0.25 and 0.50 percentage points.

The move marked the Fed's first rate increase since 2006 and provided a strong sign the world's largest economy had overcome most of the wounds of the global financial crisis.

Especially with unemployment in the US falling steadily through the current year, there had increasingly been less justification for the Federal Reserve's crisis-era policy of providing ultra-cheap money to the economy and private households.

European stock markets had anticipated the rate increase, with Germany's DAX-30 gaining 0.2 percent and the EuroStoxx-50 also climbing 0.2 percent.

More hikes to come

The Fed said it saw its benchmark rate rising further to about 1.4 percent by the end of 2016.

Watch video 01:48

Fed raises interest rate for first time in nearly a decade

That would ultimately mean raising the cost of borrowing for everyone from foreign governments and companies to home and car buyers, but it would also give savers a better deal again.

Fed Chair Janet Yellen emphasized Wednesday's move was "pre-emptive" as it came despite low inflation. She said the Fed's policies operated on a lag, meaning that the central bank wanted to head off the risk of sharply higher inflation a year from now, rather than today.

"It takes time for monetary policy actions to effect future economic outcomes," she told reporters at a news conference.

All in all, experts welcomed Wednesday's hike. "A Fed rate increase is a positive sign for the US economy to be welcomed, not feared," PNC Financial Services Group economist Stuart Hoffman said in a note.

Nevertheless, the rate hike separates the Fed from major central banks in Tokyo, Beijing or Frankfurt and elsewhere, with economies there struggling to stimulate growth.

Fed governors will closely follow what impact higher US rates will have on both domestic and global financial conditions. They will keep their fingers crossed that weak world demand and falling commodity prices will not lead to an overall bout of deflation and force the US central bank to reverse course.

hg/nz (Reuters, AP)

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