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Federal Reserve raises key interest rate for first time in 9 years; Gradual hikes expected in '16

The Fed's key interest rate, the federal funds rate, remained near zero for exactly seven years -- between Dec. 16, 2008 and Wednesday.

By Ed Adamczyk and Doug G. Ware

WASHINGTON, Dec. 16 (UPI) -- The U.S. Federal Reserve on Wednesday decided to finally increase key interest rates by a quarter point for the first time since the financial crisis, believing the domestic economy is healthy enough to withstand the hike.

Wednesday, all ten members of the central bank's Federal Open Market Committee voted for the rate increase, the Federal Reserve said in a news release -- even though three of them had expressed concern in recent weeks that a hike may yet not be in the economy's best interest.

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The last time the committee met, in October, the members determined it was a bit premature to raise benchmark interest rates beyond their levels at near zero, where they have remained -- for exactly seven years -- since Dec. 16, 2008. Federal Reserve Chair Janet Yellen subsequently indicated, though, that the rates would almost certainly rise at the Fed's Dec. 15-16 meeting.

Wednesday, the U.S. central bank noted several factors that indicate a stronger domestic economy able to withstand a rate increase.

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"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," the Fed said in the release. "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."

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The Federal Reserve also cited "considerable improvement" in the U.S. labor market and rising inflation -- although it remains under the bank's 2 percent target -- as indicators that a rate hike is now acceptable.

A November report suggested the U.S. economy could successfully weather a modest interest rate adjustment due to a steady and small unemployment rate. The report said emergency economic conditions from the 2008-09 recession no longer exist and the economy has largely rebounded.

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Further, the committee noted that the effect of monetary policy actions taken in 2015 have not yet had their full impact on the market climate.

"Recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent," the FOMC said.

In addition to Wednesday's hike of the federal funds rate, the Fed said gradual increases to the benchmark are expected to happen throughout 2016 -- as long as the economic outlook continues on target.

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"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate," it said, while adding that the rate "is likely to remain, for some time, below levels that are expected to prevail in the longer run."

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The Fed predicted in a set of forecasts, also published Wednesday, that rates are expected to increase by about one percentage point a year over the next three years -- ultimately reaching 3.3 percent by 2019.

Not all economists, though, agree with the Fed's decision to raise interest rates now -- believing a premature rise in the benchmark rates might curtail job and wage growth.

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