At a meeting of its Federal Open Market Committee, the U.S. Federal Reserve, or Central Bank, approved a quarter-point increase in its benchmark target, moving the rate from 0.91% to 1.25%, despite inflation running below the bank's targeted 2%.
The Dow Jones Industrial Average fell 14.66 points, or 0.07 percent, to 21,359.9, the S&P 500 lost 5.46 points, or 0.22 percent, to 2,432.46 and the Nasdaq Composite dropped 29.39 points, or 0.47 percent, to 6,165.50.
The stronger-than-expected U.S. economic data also boosted most U.S. Treasury yields, while traders weighed the hawkish Federal Reserve and Bank of England signals.
In explaining this second rate hike of 2017 and plans for more increases in the coming months, Federal Reserve Chair Janet Yellen said yesterday the move reflected the progress in the world's largest economy, which continues to add jobs at a solid pace.
Risk sentiment was also hit by fear of more US political turmoil after the Washington Post reported that President Trump is being investigated by special counsel Robert Mueller for possible obstruction of justice. "Notably, however, the Fed's inflation outlook (was) lowered, reflecting a more moderated outlook that is expected to invite more scrutiny on their upcoming decisions".
With GDP growth expected to remain above its long-term potential over the next few years, and the unemployment rate to remain below its long-run level, the Fed as a whole seems to be willing to look past what it sees as near-term economic noise. If the Fed raises its rate again, possibly in September, the Fed's key rate will be higher than the BOK's key rate of 1.25 percent.
She also laid down plans to reduce the central bank's balance sheet in the second half of the year.
The dollar fetched 109.35 yen, not far from Wednesday's eight-week low of 108.81 yen.
The Fed voted to increase rates on Wednesday to 1.25% and maintained its own forecast that rates would rise at least one more time in 2017. US shares looked set to open lower, with Dow futures down 0.3 percent and S&P futures off 0.5 percent.
NOGUCHI: Fed officials raised interest rates today despite the fact that the latest readings on inflation show that it is not picking up steam.
Commodity-linked currencies such as the Australian Dollar, New Zealand Dollar and Canadian dollars, also pared gains against the US currency after touching multi-month highs following the release of USA data. July WTI oil dropped $1.73 or 3.7 percent to $44.73 a barrel on the New York Mercantile Exchange, the lowest since November.
In the currency markets, the USA dollar was up 0.4 per cent at S$1.3820 late in Asia.
Euro zone government bond yields edged up in early trade.
Williams predicts a "peak" rate under 2 per cent due to delayed tax cuts, potential protectionism and the lagged effects of previous hikes yet to come through - a process that generally takes 18 months to hit consumer spending in full.