Dive Brief:

• The  Federal Open Market Committee yesterday ended an extraordinary seven year rate-freeze and decided to raise the target range for the federal funds rate to 0.25% to 0.5%; officials predict they will raise short-term rates about 1% annually for three years.
• Despite worries that the decision could negatively impact utility stocks, the Dow Jones utility average index showed sector stocks rose slightly amid the Fed's assurances that future interest-rate increases will be gradual, Bloomberg News reports. 
• Interest rates have remained low in order to stimulate economic recovery, and the Federal Reserve indicated that should the recovery falter, it would be willing to change its strategy.

Dive Insight:

The stock market appears to have anticipated the Fed's decision. While some analysts predicted a selloff once the U.S. central bank announced it would raise rates, stocks rose both overall and in the utility sector. At close, the Dow was up more than 220 points and not one company in the Dow Jones utility index closed at a loss.

Earlier, Bloomberg Business reported that the Fed's decision to raise rates after spending the better part of the decade near 0% could have a negative impact on utility stocks, which investors bought up for their predictable returns and dividends.

“Interest rate increases are historically negative for utility stocks,” Kit Konolige, senior utility analyst for Bloomberg Intelligence, told the outlet. "They react a lot like the way the bond market does when interest rates rise, which is negative."

Moody's Investors Service said that raising rates could be "credit-negative" for the utility sector, especially those selling power in wholesale markets who will face higher capital costs, with no guarantee they can be recovered. 

But Janet Yellen, who chairs the Board of Governors of the Federal Reserve System, said that the U.S. economy is performing well and that the central bank is in no hurry to raise interest rates again. Policymakers have emphasized that the pace of future rate increases will hinge on progress in economic data, and will likely not exceed 1% a year.

In a statement, the Fed said it expects economic activity to continue expanding at a moderate pace, with labor market indicators continuing to strengthen.

"Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced," the Fed said. "Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further."