Here’s a breakdown of the rationale for the rate increase:
- Labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year job gains have been solid in recent months and the unemployment rate has declined.
- Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.
- Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
- The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
Stocks rallied sharply on the news of the rate hike, while Treasury focused ETFs fell. The iShares Barclays 1-3 Year Treasury Bond Fund (NYSE:SHY) hit a new 52-week low on the news, as did the iShares Barclays 7-10 Year Treasury Bond Fund (NYSE:IEF).