Federal Reserve hikes interest rates for 1st time since 2006

The U.S. central bank began raising interest rates today from record lows, as it hiked its benchmark rate by a quarter of a percentage point.

The Federal Reserve raised therange for its federal funds rate to between 0.25 and 0.5 per cent on Wednesday, the first time America's central bank has raised its benchmark ratesince 2006.

In addition to its benchmark federal funds rate, the Fedalso hiked itsinterest rate on excess reserves and its rate on overnight reverse repurchase agreements by the same amount 25 basis points.

• ANALYSIS: Fed's rate hike will be a tough lesson for debt-addled Canada
• PITTIS: Painful adjustment coming as Canada, U.S. economies out of sync

"This action marks the end of an extraordinary seven-year period," chair Janet Yellen said in a question-and-answer session after the bank's statement was released. "Amodest increase is now appropriate."

That's the Fed's way of sayingit thinks the U.S. economy is finally strong enough to start standing on its own two feet. But the bank made it clear it is not in a hurry to hike rates rapidly, suggesting"gradual increases" arethe general plan.

"The Fed is [saying] we're going to raise rates a tiny bit, and then maybe in 2016 a tiny bit more," said DianeSwonk, chief economist ofMesirowFinancial. "But they want to acknowledge that the economy is strong enough to handle this, without hurting any growth."

Swonk suggeststhe Federal Reservewill be cautious and slow as it begins to ratchet up rates over time.

"Yellenwants to be a hovercraft, not a rocket ship,"she said in an interview withCBC-TV'sThe Exchangeon Tuesday.

The projections of Fed members for their expectations of rate policy to come known as the "dot plot" by Fed watchers suggests the Fed is assuming four more modest rate hikes in 2016 to bring the rate to1.375 per cent, followed by four more in 2017 to bring the rate to 2.375 per cent.

Economist Michael Gregory at BMOsays Wednesday's hike is a sign that rates are going to slowly rise only if everything goes according to plan. "The normalization process has begun, but policy rates are still going to be 'low'for a very long time," he said.

The reaction from major U.S. banks was swift. Within minutes of the announcement,Wells Fargo announcedit was hiking its prime lending rate to 3.5 per cent from 3.25. Citibank, JPMorgan Chase, Bank of America and U.S. Bancorpwere quick to follow. Thatmeans people borrowing money from those bankshave to pay more for some of their adjustable-rate mortgages, home equity lines of credit and consumer loans.

But while it's going to charge borrowers more, Wells Fargo announced nohike to its deposit rate the amount it pays to savers when they store their money there.

Stock markets rally

Investors on both sides of the border cheered news of the Fed hike as a vote of confidence in the U.S. economy.

The Dow Jones industrial average, which was up about 75 points just before the Fed announcement,ended the trading day with a gain of 224 points, at 17,749.Bank stocks rose as loan interest rateswillincrease, boosting the bottom lines of lenders.

The Toronto market alsosaw a big jump, with the S&P/TSX compositeindex up 246 points, or 1.9 per cent at day's end its second straight day of 200-pointincreases.

"The market as a whole is happy to get this first rate hike out of the way and potentially focus on other things, like the state of the economy," said ScottGuitard, portfolio manager at Fiduciary Trust Canada.