After The Fed's Historic Rate Hike: Yellen Charts A Cautiously Positive Path Ahead

News Wednesday that the Federal Reserve is lifting interest rates from near-zero levels was historic, but it wasn't much of a surprise. Investors and economists were all but certain that the Fed would end the era of its zero-interest-rate policy in December. Instead, markets are now focusing on the economic hints contained in the Fed's policy statements.

Coming seven years to the day after the Fed first plunged its benchmark rate to its lower bound in the midst of the financial crisis, the decision reflects how much the U.S. economy has healed since the Great Recession.

Fed Chair Janet Yellen told reporters at a press conference that although the recovery was still incomplete, the liftoff decision "signals the Committee's confidence that the economy will continue to strengthen."

"I feel confident about the fundamentals," Yellen added, repeating her general synopsis that economic growth has been steady, if muted, and has held through much of the year.

Compared to the Federal Open Markets Committee's previous release in October, however, Wednesday's statement presented a noticeably rosier view on the employment situation, noting the "range of recent labor market indicators, including ongoing job gains and declining unemployment." Despite some areas of slack, like the relatively high proportion of people working part-time who would like to work full-time, the Fed seemed pleased with employment conditions.

2016 And Beyond

In some ways, the path that the Fed will take in the future will matter more than when the hikes got started. "It's important not to over-blow the significance of this first move," Yellen told reporters. "Monetary policy remains accommodative."

Translation: Borrowing is still extraordinarily cheap by historical standards, and it's going to stay that way for some time.

Economists surveyed by CNBC predicted, on average, three separate rate raises in 2016, though projections vary significantly. The Fed's own projections are laid out on the so-called “dot plots” that reflect each voting member's views for future rates, provided that their economic predictions hold. Though largely hypothetical — and often wrong — the dot plots reflect the changing attitudes of Fed officials as they respond to new data.

In comparison to September's projections, Fed officials on the whole saw a slightly slower path of rate hikes in coming years, though most still see the federal funds rate moving to 3.5 percent on the longer term. Gone are the most dovish of the Fed's projections, one of which showed benchmark rates even breaking into negative territory.

'No Simple Formula'

The stickiest issue in raising rates was the lackluster pace of inflation. The Fed's preferred core inflation measure, the personal consumption index excluding food and energy, showed average year-over-year price gains of just 1.3 percent over the past 12 months, well below to the Fed's explicit lower bound target of 2 percent — a target that actual inflation has missed for 42 straight months.

Although another measure of inflation, the core consumer price index, posted 2 percent growth in November, market expectations for future inflation are muted. Yellen explained the apparent disconnect between pushing a rate hike even as inflation remained significantly below-target by pointing to global developments keeping domestic inflation down.

"Much of the recent softness in inflation is due to transitory factors that should abate over time," she said, citing the relative strengthening of the dollar, which depresses exports, and continuing weakness in energy prices. There is no "simple formula for what we need to see in inflation," Yellen added.

The Fed's statement indicated that the rate-setting committee would "carefully monitor" progress toward its 2 percent inflation goal. The Fed has a dual mandate of maximizing employment while keeping inflation at manageable levels.

Yellen also emphasized that, unlike in the mid-2000s, the Fed would likely not engage in a series of mechanical, predictable rate hikes moving forward. But investors had reason to expect the Fed wouldn't stop at one quarter-point rate hike, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank.

In a note to clients, LaVorgna wrote that the Fed's statement paves the way for further rate hikes in 2016, economic and financial conditions permitting.