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Federal Reserve hikes key interest rate by 0.25%, signaling confidence in economy

The Federal Reserve announced Wednesday it will raise its benchmark interest rate by 0.25 percent — the first hike in nearly a decade.

The Federal Reserve on Wednesday raised its key interest rate for the first time in nearly a decade, expressing confidence that the economy has recovered sufficiently from last decade's severe recession to withstand higher lending costs.

All the same, Fed Chair Janet Yellen said the central bank's 0.25 percent hike in its federal funds rate — the percentage that banks charge one another for short-term loans — will be followed only by "gradual adjustments" that can be slowed if economic activity doesn't continue to "expand at a moderate pace."

She also said that while risks to continued economic growth still exist, "these risks appear to have lessened since last summer," when turmoil in China's stock markets rippled across the Pacific.

Two areas that Yellen expressed concern over were the labor market and inflation, which has stayed well below the Fed's 2.0 percent annual target.

"The labor force participation rate is still below estimates of its demographic trend," she said. "Involuntary part time employment remains somewhat elevated. And wage growth has yet to show a sustained pickup."

On inflation, she said that the expected increase in prices was being held down by factors such as low gas prices that "we expect will diminish over time."

The rate hike will affect consumers on numerous fronts, ranging from interest rates on credit cards and mortgages to the returns on investments and savings accounts, but experts say the impacts will be modest to begin with.

Investors' immediate reaction to the Fed's announcement, which was widely anticipated, was muted. Stocks moved slightly up.

The bond market didn't' react much. The yield on the 10-year Treasury note held steady at 2.27 percent.

The move by the Fed's Open Market Committee to lift its key rate by a quarter-point -- to a range of 0.25 percent to 0.5 percent -- is the first increase since the panel pushed the key rate to 5.25 percent on June 29, 2006. In a succession of moves necessitated by the financial crisis and the Great Recession that officially ended in mid-2009, the committee took the rate to zero exactly seven years ago, on Dec. 16, 2008.

There were no dissents, even though multiple committee members publicly over the past few months have expressed reservations about rate hikes. The committee also voted to raise the discount rate a quarter-point to 1 percent.

In addition to the usual documents released with the post-meeting statement, the Fed also put out a statement outlining the mechanics of how the new rate will come to pass. The program will be an ambitious one, involving $2 trillion of securities that will be used in overnight trading to push the rate into the desired range. However, the FOMC statement said it will be some time before the Fed starts unwinding its mammoth $4.5 trillion balance sheet.

The move shows that the Fed is confident that the U.S. economy has improved a great deal since the financial crisis. But in its statement announcing the rate hike, the Fed's Open Market Committee said expects "only gradual increases" in rates going forward, indicating wariness over the strength of the recovery. In particular, the Fed will be watching to ensure that the rate hikes do not significantly crimp strong consumer demand, or cool a housing market that has also propped up recent growth.

In a Dec. 9 Reuters poll, economists forecast the federal funds rate would rise to be 1.0-1.25 percent by the end of 2016 and 2.25 percent by Dec. 31, 2017.

The Fed has been unusually patient in nurturing this economic recovery, with interest rates held near zero.

Since World War II, the average U.S. expansion has lasted just under five years, while this one has been going on for six and a half. Throughout that time, though, the economy has struggled to move beyond modest 2 to 2.5 percent annual growth. As a result, the Fed has stayed put for a full seven years, about twice as long as the central bank usually waits to begin tightening.

The Associated Press and Reuters contributed. This article originally appeared on