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US Federal Reserve signals growing confidence in economy with rates hike

The US Federal Reserve has raised interest rates for the second time in a decade, signalling growing confidence in the state of the nation's economy.

The central bank's Federal Open Markets Committee (FOMC) voted to hike its benchmark interest rate by 25 basis points to between 0.5% and 0.75%, from its previous range of 0.25% to 0.5%.

It marks the second round of monetary policy tightening since the financial crisis, with the FOMC having last increased the target in December 2015 from a range of 0% to 0.25%.

The move had been widely anticipated by investors amid signs of growing economic strength across the US, particularly in the labour market.

The announcement sent the dollar higher, knocking the pound's earlier gains to trade 0.15% lower at 1.263 against the US currency.

US stock market reaction was mixed, with the Dow Jones Industrial Average falling 0.18%, while the S&P 500 Nasdaq Composite was relatively flat.

The Fed's rate setting committee said it decided to raise rates in light of higher inflation expectations and solid gains in the US jobs market.

"The committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market conditions will strengthen somewhat further," the FOMC statement said.

Earlier this month, the US Labour Department released data showing that the national unemployment rate fell to a nine-year low in November to 4.6%, prompting further speculation that the Fed would hike rates at this month's meeting.

The FOMC signalled further tightening could come in 2017, but said big hikes were not on the cards.

"The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."

Kasia Kiladis, investment director for US equities at Fidelity International, said further monetary policy tightening will depend on the effect of anticipated policies by President-elect Donald Trump.

"The frequency and magnitude of further rate hikes will mainly be reliant on the timing and impact of Donald Trump's pro-growth inflationary policies but also his ability to deploy trade tariffs.

"Investors continue to be positive on Donald Trump's fiscal stimulus and tax reform policies which could lead to renewed business investment, thereby, driving productivity and economic growth."

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