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Federal Reserve raises interest rates for first time in nine years

Modest increase of a quarter point signals further rate increases will likely be made slowly as economy improves

The U.S. Federal Reserve raised interest rates by a quarter point Wednesday. The modest hike — 0.25 percentage point, to 0.25 to 0.5 percent — is the first in nearly a decade and signals that further rate increases will likely be made slowly as the economy continues to strengthen.

Wednesday's policy shift was a big step on the tricky path of returning monetary policy to a more normal footing after aggressive bond buying and near-zero borrowing costs in the aftermath of the Great Recession.

The Fed's move to lift its key rate by a quarter point ends an extraordinary seven years of near-zero rates that began at the depths of the 2008 financial crisis. Consumers and businesses could now face modestly higher rates on some loans.

Labor groups opposed a rate increase because they believe it will depress wage growth. Higher interest rates mean businesses are less likely to expand, reducing the demand for new employees.

But the Fed's action reflects its belief that the economy has finally regained enough strength, six and a half years after the recession ended, to withstand higher borrowing costs. The statement announcing the rate hike said the committee expects "only gradual increases" in rates.

China stocks rallied on Thursday removing a major source of uncertainty about the U.S. central bank's policy and European shares surged in early trading on Thursday after investors saw the U.S. Federal Reserve's move as a sign of confidence in the world's biggest economy. 

Federal Reserve Chairwoman Janet Yellen conceded during a Wednesday press conference that "wage growth has yet to show a sustained pickup" but said the Fed expects "labor market indicators will continue to strengthen."

"The first thing that Americans should realize is that the Fed's decision today reflects our confidence in the U.S. economy," she said. "We believe we have seen substantial improvement in labor market conditions, and while things may be uneven across regions of the country and different industrial sectors, we see an economy that is on a path of sustainable improvement."

Investors' immediate reaction to the Fed's announcement, which was widely anticipated, was muted. Stocks moved slightly up. Higher interest rates in the U.S. tend to cause the dollar to strengthen against other currencies.

For months, Yellen and other Fed officials have said they expected any rate hikes to be small and gradual. But nervous investors have been looking for further assurances.

Her decision to raise interest rates was approved unanimously by the Board of Governors of the Federal Reserve System, which oversees the Federal Reserve banks.

The New York Fed, which handles the mechanics of monetary policy three blocks from Wall Street, will turn on Thursday to a suite of lightly tested tools to pry rates higher.

It will be far more difficult than in the past.

Years of unprecedented stimulus have left the Fed swollen with $4.5 trillion in bonds and the banks bursting with $2.6 trillion in reserves. All this liquidity has eclipsed the effectiveness of the fed funds market as the central bank's primary policy lever.

So the Fed will seek to raise rates to the new range of 0.25 to 0.5 percent by setting a floor and a ceiling with other levers that may need to be adjusted on the fly, depending on how markets react.

Al Jazeera and wire services

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