What happened?
In a widely anticipated move, the US Federal Reserve raised its interest rate for the first time in almost a decade.
The federal funds rate rose a quarter of a percentage point to a range between 0.25 per cent and 0.5 per cent.
By comparison Australia's cash rate is at record low two per cent.
Why?
In 2008, at the onset of the global financial crisis, the Fed slashed its interest rate to near zero from 3.5 per cent in an attempt to stimulate the economy.
After creating 5.5 million jobs in two years, the US economy is emerging from the "great" recession and is expected to grow in the year ahead.
That allows the Fed to raise its interest rate from emergency levels to more normal ones to help keep inflation under control.
What did the Aussie dollar do?
It fell after the Fed's announcement, bottoming out at 71.77 US cents, but then bounced above 72 US cents.
The Aussie has lost a third of its value in the past two years, mostly because of speculation the Fed would hike its rate.
AMP Capital chief economist Shane Oliver said the dollar's muted reaction was because the Fed said any further increases would be gradual.
"With the Fed undertaking a dovish rate hike there is a risk that a further fall in the Australian dollar will be further delayed," he said.
And the Australian share market?
It surged because traders saw the decision to raise the US interest rate as a positive.
"The market is reacting well to the Fed's decision, which reflects the strength in the US economy," IG's market analyst Angus Nicholson said.
What about Australian interest rates?
Another cut looks less likely after two months of strong local jobs figures.
Dr Oliver said if the Fed's rate hikes are gradual, then the RBA might need to cut again to help push the Australian dollar lower to stimulate the economy.
But if the Fed becomes aggressive with its rate rises the Aussie could fall to around 60 US cents next year, making an RBA rate cut less likely.
The RBA last lifted rates in November 2010, while its most recent cut was in May this year
US Fed raises, citing ongoing recovery
The US central bank has raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent.
The US central bank has raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent.
The Federal Reserve has raised interest rates for the first time in nearly a decade, signalling faith that the US economy had largely overcome the wounds of the 2007-2009 financial crisis.
The US central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.
"With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate," Fed Chair Janet Yellen said in a press conference after the rate decision was announced.
"The economic recovery has clearly come a long way."
The Fed's policy statement noted the "considerable improvement" in the US labour market, where the unemployment rate has fallen to 5 per cent, and said policymakers are "reasonably confident" inflation will rise over the medium term to the Fed's 2 per cent objective.
The central bank made clear the rate rise was a tentative beginning to a "gradual" tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target.
"The process is likely to proceed gradually," Yellen said, a hint that further rises will be slow in coming.
She added that policymakers were hoping for a slow lift in rates but one that will keep the Fed ahead of the curve as the economic recovery continues.
"To keep the economy moving along the growth path it is on ... we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly."
New economic projections from Fed policymakers were largely unchanged from September, with unemployment anticipated to fall to 4.7 per cent next year and economic growth hitting 2.4 per cent.
The Fed statement and its promise of a gradual path represented a compromise between policymakers who have been ready to raise rates for months and those who feel the economy is still at risk from weak inflation and slow global growth.
"The Fed is going out of its way to assure markets that, by embarking on a 'gradual' path, this will not be your traditional interest rate cycle," said Mohamed El-Erian, chief economic advisor at Allianz.
Fed officials said they were confident the situation was ripe for them to make a historic turn in policy without much disruption to financial markets, which had expected the rise this week.
US stocks rallied on the news, in part because the Fed made clear it would proceed slowly with further tightening. Yields on US Treasuries rose, while the dollar was largely unchanged against a basket of currencies. Oil prices fell sharply before paring losses.
Watch: Rate rise in the US is likely to have global repercussions
