Fed raises interest rates

Members of the Federal Open Market Committee agreed Wednesday to increase the federal funds rate by 25 basis points, after years of keeping it at zero to 0.25%. All members agreed with the decision, after seeing ongoing job gains and declining unemployment and inflation indicators.

“The economic recovery has clearly come a long way, although it is not complete,” Chairwoman Janet Yellen said at a news conference at the end of its two-day meeting.

Future rate changes are likely to be gradual and remain low, the members said. Given that uncertainty, “we are not suggesting any change in allocation strategy at this time,” said Tim Barron, chief investment officer for consultant Segal Rogerscasey.

FOMC members forecast raising rates one percentage point each year over the next three years, reaching 3.3% by the end of 2018.

Steven Friedman, senior investment strategist for BNP Paribas Investment Partners, noted some “interesting cross-currents” between the policy statement and the members' projections. “On the one hand, the statement was overall on the dovish side” about gradual rate increases. “On the other hand … the median year-end 2016 projection remains at 100 basis points of additional tightening from here. This is a good deal more than reflected in market pricing,” Mr. Friedman said.

Kevin Wagner, a senior retirement consultant with Towers Watson & Co., said: “The main impact we will see is a bit of an increase in pension funding levels, as the value of the reported liabilities goes down.”

“So far the market reaction is reasonably favorable,” said Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income. “There is a very small rise in interest rates in the front end of the yield curve. The market has had a lot of time to warm up to the idea of the Fed hiking rates.”

FOMC members “are probably going to be very careful not to unduly dampen economic activity,” Mr. Tipp said.