Markets had priced in a rate hike as a near certainty ahead of the meeting, with all eyes on the economic projections of the Fed's economists and prospects for more increases in the second half of the year.
While investors and economists spend the next few days deciphering new Fed Chairman Jerome Powell's decision to hold a press conference after every meeting and what the projected path of future hikes means for the economy, the lastest hike will hit your wallet nearly immediately. That could spark higher inflation.
The US economy continues to strengthen, the Fed indicated, and it no longer needs the historically low interest rates that were put in place in the aftermath of the financial crisis to stimulate growth.
The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the USA central bank's shift from policies used to battle the 2007-2009 financial crisis and recession.
The Fed's preferred measure of inflation, which strips out food and energy prices, climbed in May to 2.2% and registered the biggest annual jump in six years.
Nor is the Fed obligated to hike rates just because it has publicly said it will do so. "Most people who want to find jobs are finding them, and inflation and interest rates are low". "This is a rare occurrence where the chairperson can help influence and shape the overall dot plot message", Ruskin, the global head of G10 FX strategy, said in a preview. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March. This was the seventh rate hike announced by the FOMC since December 2015. In the longer run, it maintained the forecast for 1.8% growth.
"Is it on a cyclical basis lower as the economy gets hotter and hotter?" In early March, the Fed chief told Senators that unemployment - then at 4.1 percent - was "at or near or even below most estimates of the natural rate of unemployment", adding that there was "no evidence that the economy's now overheating".
US central bankers again emphasized on Wednesday that the goal is "symmetric", and they said in minutes of the May meeting that "a temporary period of inflation modestly above 2 per cent" would help anchor long-run inflation expectations around the target. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year.
Eurozone growth is slowing down and rising political uncertainty as evidenced by the formation of the Italian government will give the European Central Bank food for thought.
This means that despite the rise in U.S. yields, the spread/differential between USA and India's 10-year bonds has been maintained at around 4.5-5 percent, which is attractive.