The era of zero official US interest rates is drawing to a close after the Federal Reserve, as widely expected, raised rates yesterday. Wealth managers across the globe have reacted.

The wait is over. Yesterday, the US Federal Reserve’s Open Market Committee moved towards interest rate “normality” by raising the target range for the federal funds rate by 25 basis points, to 25-50 basis points, ending an almost seven-year period after pulling rates down to zero in the wake of the 2008 financial market crash.

Falling headline unemployment and reasonably robust economic growth have emboldened the Fed, under chair Janet Yellen, to begin a slow process of raising rates towards more normal levels. The US central bank is seen pushing rates up while other central banks, such as the European Central Bank and Bank of Japan, are seen as remaining in a very accommodative stance to reflate their economies. The move was widely anticipated: a paradox may be that the fact of action by the Fed, widely priced in, may end some of the uncertainty dragging on equity markets in recent weeks and months. Time will tell.

Here is a selection of reactions from banks and wealth management houses:

BlackRock Investment Institute
For the first time in nearly a decade, the Federal Reserve raised interest rates, signalling its faith in the US economic recovery and marking an end to a historic period of monetary policy accommodation. While the decision to raise rates by 25 basis points was widely anticipated, the ramifications – and opportunities – for global investors are notable.

The Fed’s action has garnered plenty of attention, but investors should be aware of what matters most, and that is the path of future rate hikes. The increase in borrowing costs may feel like a seismic change, but that’s primarily because it’s been so long since rates have been increased.

View the hike not so much as the Fed slamming on the brakes, but instead taking its foot off the gas pedal. The reality is that, by historical standards, rates are extremely low and are likely to remain so. Indeed, in announcing the hike to a range of 0.25 per cent to 0.50 per cent, the Fed said it expects rates to stay subdued, and that the hiking cycle will be gradual. High debt levels, questionable productivity growth, slow economic growth, ageing populations, strong demand for high-quality assets and ongoing easy monetary policies elsewhere around the world will all likely contribute to keeping a lid on rates even as the Fed normalises its policy. And the gradual nature of the tightening cycle should allow markets to absorb the increases with relative ease.

It’s also important to remember why the Fed is comfortable taking this action. By many measures, the economic recovery has not been a robust one, but today the US economy is showing further signs of life. The most recent employment report, for instance, showed the US economy created more than 200,000 net new jobs in November, while the unemployment rate held steady at just 5 per cent.

Of course, as we’ve witnessed throughout 2015, financial markets are not immune to bouts of volatility, as evidenced by the recent tumult in high-yield markets. Economies outside the US continue to struggle, and emerging markets are likely to remain under pressure, although some adjustment has already occurred in anticipation of rate normalisation. Equities may also find it difficult to advance in the face of an appreciating dollar and stagnant corporate earnings, placing greater import on investment selectivity. And while we do anticipate the Fed will be gradual in bumping up rates, there can be no guarantees about the pace of increases and the final Fed funds rate once central bankers are done.

Overall, investors should view the rate hike for what it is: good news and a testament to a resilient US economy. Expect ongoing volatility, but remember that while rates are no longer at zero, they remain extremely low, and will likely remain low for some time. We prefer stocks, particularly European and Japanese equities, over bonds, and market-neutral strategies such as long/short equity and credit.

Barclays
The decision was largely expected by markets and telegraphed by the Fed in recent weeks. Therefore, we expect markets to focus on forward-looking matters, including the anticipated pace of tightening, the updated set of economic projections, and the overall tone of today’s communications. While much of this messaging will come in the press conference to follow, the statement does speak to the committee’s expectation that the rate hike path will be gradual.

The decision to raise the target range was based on cumulative progress and confidence in the outlook. In justifying the rate hike, the statement combines realised progress in the form of “considerable improvement in labour market conditions this year” with the outlook “the stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labour market conditions and a return to 2 per cent inflation.

Russ Mould, investment director at AJ Bell
Markets like certainty and had already priced in a 0.25 per cent rise in interest rates so the lack of a nasty surprise from the Fed will be reassuring after what seems like months of shilly-shallying, especially as chair Janet Yellen is suggesting future increases will be slow and gradual.

The fact that Yellen suggests rates may not reach normal levels for sometime does warn that there is work to be done and strong progress in US benchmark indices should not be taken for granted in 2016, especially as a higher dollar and increases in corporate borrowing costs on the bond markets are tightening monetary policy with or without the Fed.

The dollar fell against the euro and then rallied as the Fed decision was released and further gains in the buck look likely in 2016, especially as the Fed moves toward tighter policy and Europe and Japan continue to play fast and loose.

A stronger dollar has historically been negative for emerging markets, which have been under the cosh this year, and investors may remain wary of these developing arenas, at least until greater visibility of Fed policy for 2016 begins to develop.

Nancy Curtin, CIO at Close Brothers Asset Management
Far from ringing an alarm bell for investors, this is an endorsement of the strength of the US economy. The labor market has been beating expectations, with wage growth now coming through. Consumer confidence continues to climb, and retail sales are improving. To cap off the good news, inflation is increasing too. Yes, manufacturing figures are still far from impressive, but when the economy is looked at across the board, the momentum is there for Yellen to act.

While her dovish comment suggests there will be no steep or surprising rises, investors will now be looking to the potential fallout around the emerging markets, particularly those already impacted by the dollar strength. The US is strong enough to withstand the change, but the continued weakness in commodity prices is already a concern, so today’s decision will certainly be a hangover for those beyond the developed economies as we move into the New Year.

Dean Turner, economist at UBS Wealth Management
Markets should welcome the decision to hike US rates as it puts months of uncertainty to one side. We expect the pace of tightening next year to be gradual, with four more hikes in 2016. Although this is more hawkish than the markets currently expect, we believe that the US economy will continue to expand. Tighter monetary policy in the US against easing of monetary conditions in Europe and Japan supports our current tactical positioning. We remain overweight equities, and within this we maintain a preference for Europe and Japan. We also favour European high-yield bonds.

The US interest rate rise is unlikely to influence the timing of the Bank of England’s decision to hike rates. However, it still looks as though the BoE will be the first central bank to follow the US, though the inflation and wage outlook over the next few months suggests they have time to wait. We currently expect the BoE to raise rates in May, followed by a further hike in November.

Stephanie Sutton, investment director - US equities, Fidelity International
Investment commentators had been earnestly debating the likely timing of the first US policy rate hike from virtually zero for several years now. However, each time an increase appeared imminent, expectations had been dashed owing to either weak economic data or events, such as the recent China-related market volatility. However, this time around economic data and global conditions were supportive enough to allow the Fed to initiate its first interest rate hike in almost a decade. With the first rate hike now behind the market, the focus will turn to the pace of further rate hikes. Whilst gradual rate increases have been priced in, any acceleration in the pace might create uncertainty and volatility.

Further, whilst the hike in itself acknowledges the good health of the US economy, it certainly increases the debt burden on both households and companies. Thankfully, there is little risk of payment shocks or greater defaults post lift-off as the bulk of household and non-financial corporate debt is in fixed rate loans. To illustrate, approximately 90 per cent of US mortgage debt is locked into fixed rates and the modest monetary tightening will not have a major impact. Despite this, the two possible areas of concern include student debt and sub-prime auto loans as these loans have witnessed high delinquency rates rise in the recent past. However, increased delinquency in these two areas does not really threaten the financial stability of the economy. In addition, a strengthening economy and job growth will help debtors to service these loans.

Dominic Rossi, global chief investment officer, equities, Fidelity International
US consumers are entering 2016 stronger than they have been in a decade. US consumption will easily be able to weather the expected modest interest rate increases and the domestic economy may well turn out to post a surprisingly strong performance.

The strength of the domestic economy leaves the US equity market better placed to cope with tighter monetary policy than other markets. This means that in US dollar terms, we can continue to expect the US market to outperform.

Alasdair Cavalla, economist, Centre for Economics and Business Research
The move is an unusual one for two reasons. The Fed has never waited this long into a recovery to raise rates before. Yet the decision still comes too early. The paradox arises because this recovery is easily the weakest and slowest on record, more so even than after the Great Depression. Growth was most recently recorded at 2.2 per cent, having averaged a tepid 2.1 per cent since GDP stopped falling in early 2010. Output gains have also been inconsistent, and a stronger dollar will compound that by dragging on exports. Inflation stood at 0.5 per cent for November, with core inflation only just back at the 2 per cent target.

The Fed would have a hard time arguing that these figures require immediate action. The last time it increased the benchmark rate in July 2006, unemployment was at 4.6 per cent. Growth had averaged a robust and consistent 3 per cent over the previous year, pushing inflation up to 4.1 per cent. Core inflation, which ignores volatile food and energy prices, was also comfortably above target at 2.7 per cent. By past standards, the decision to tighten policy at present seems overly cautious.

However, in its efforts to be predictable the Fed effectively constrained its options before today’s decision. Having signalled an intention (admittedly not cast-iron) to raise the rate in its September meeting, it then left it unchanged, causing panic in financial markets. The Dow Jones closed down 2 per cent on the day following the announcement, with European markets losing more. If avoiding a repeat was a factor in today’s decision – likely given the lack of any inflationary danger – this is a case of putting the cart before the horse. Likewise, equity markets now look dangerously overvalued following the Fed’s QE programs. Having risen far faster than profits and earnings in the businesses they represent, this makes tightening more risky. And three high-yield bond funds have liquidated in the past fortnight. Financial markets are supposed to facilitate the working of the real economy by allocating capital, rather than making that task more difficult. Nevertheless, given the need for a central bank to have credibility, the Fed had to follow through today (yesterday). Revisiting the role of financial markets will be necessary later.

Jeff Keen, director, fixed income and macro research at Waverton Investment Management
There is still a material divergence between the median Fed expectation for rate rises and those priced in by the markets. The Fed’s median forecast for the end 2016 rate is still 1.4 per cent which equates to roughly four further hikes. This compares to market expectations of only 2 equivalent hikes over the same period. The market will therefore still need to watch the Fed’s policy as it wrestles with a core rate of inflation of 2 per cent versus a weak manufacturing sector which is struggling with a strong dollar. In our view, the difference between the Fed’s and the market’s expected path for rates in 2016 means that risks for US Treasury bond markets are skewed to the downside, especially as the labor markets show strength and as core inflation continues to rise from a low base.

Christophe Donay, head of asset allocation and macro research
The focus will now move to what comes next. We expect the pace of tightening to be very gradual, with only a further two 25-basis point increases in 2016, taking the target range to 0.75-1.00 per cent by the end of the year. This is a slower than the consensus, which is for three rate rises in the coming year. We think that tightening monetary conditions as a result of a stronger dollar and widening corporate bond spreads will deter the Fed from moving more aggressively.
 
The immediate impact of the Fed’s tightening on markets has been very limited, since the "dovish hike" was widely anticipated, and fully priced in across asset classes. This was a factor in the recent widening of corporate bond spreads, notably in US high-yield, and further monetary tightening will continue to push up spreads during 2016.
 
Our core scenario for the coming year remains unchanged. Tighter monetary conditions will contribute to a lack of momentum in US economic growth, which we project at 2.3 per cent in 2016, little changed from an estimated 2.5 per cent in 2016. Given an absence of momentum in economic growth and corporate earnings growth (which we expect at just 5 per cent in 2016 for the S&P 500), as well as stretched valuations, returns potential for developed equity markets will be limited, to around 7-10 per cent (including dividends). European equities are likely to outperform US equities, since economic recovery in the euro area is less advanced and monetary policy is more supportive.
 
Uncertainty over the timing and magnitude of Fed tightening, combined with the imbalances created by the desynchronisation of central bank policies, means that volatility on financial markets will increase in 2016. Robust diversification will therefore remain highly important. We expect a gradual rise in rates on 10-year US Treasuries to 2.7 per cent by the end of 2016, as monetary policy tightens. However, US Treasuries will likely remain attractive to protect portfolios against shocks to equity markets. Although the Fed’s historic rate rise looks to have passed off smoothly, the calm on markets is unlikely to last for long.