US stocks initially greeted the decision with a muted response, but both the Dow and the Standard & Poor's 500 later rallied strongly and were up 1.28 per cent and 1.45 per cent respectively at the close.

Under the peg which links the Hong Kong dollar to the US dollar, the Hong Kong Monetary Authority will decide on how to react to the Fed’s decision. Before the rise, the base rate stood at 0.5 per cent, representing the discount window lending rate between the HKMA and commercial banks.

Commercial banks will decide individually whether to increase their lending or deposit rate.

As part of measures taken by the Fed during the global financial crisis in 2008, its fund rate was cut to between zero and 0.25 per cent, where it had stayed until today. US interest rates had previously not increased since 2006; before that, rates rose from 1 per cent in June 2004 to 5.25 per cent in June 2006.

Mohamed El-Erian, chief economic advisor for Allianz said the Fed was treading carefully.

“Wrapped in dovish language, the Federal Reserve has just embarked on what will be the loosest tightening in its history,” he said. “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. Instead it will be one remembered as an unusually loose tightening.”

US bond prices sold off in the short end after the decision, while long prices rallied, while the US dollar gained against the euro and yen modestly.

“The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 per cent objective,” the FOMC said in its statement following a two-day meeting in Washington. The Fed said it raised rates “given the economic outlook, and recognising the time it takes for policy actions to affect future economic outcomes.”

Fed Chair Janet Yellen echoed this at a news conference, when she stressed that the rate hike was pre-emptive. Inflation still remains well below the central bank’s 2 per cent target, largely because of transitory factors such as falling oil prices.

Yet the Fed made the move because its policies operate on a lag. Yellen wanted to head off the risk of sharply higher inflation a year from now, rather than today.

“It takes time for monetary policy actions to effect future economic outcomes,” she said.

Heng Koon-how, senior foreign exchange strategist at Credit Suisse, said he believed a coming round of interest rate increases likely meant rates would rise to 1 per cent by December 2016.

Since the US adopted its aggressive easing of monetary policy in 2008, about US$110 billion worth of funds has flowed into the Hong Kong equity and property markets, according to the HKMA.

HKMA chief executive Norman Chan Tak-lam cautioned in September that higher US rates “may lead to some capital outflows”.

Brett McGonegal, chief executive of Reorient, said the rate rise may hurt the US economy. “There is nothing in the numbers nor the current state of the economy that warrants a rate rise,” he said. “In fact the numbers and state of spreads and high yield debt portend a pretty ugly economic situation. This is a deadly game that they are playing and they risk damaging a fragile economy beyond repair.”

McGonegal said he believed the US target rate would not go up more than 50 basis points in this cycle.

“Unfortunately for Hong Kong, the biggest loser in the rate-raise scenario is the property market. Raising rates via the peg into a very slow market is very damaging. Property prices will come down in the near term and I fear that mainland investors will start to sell on the back of this move, pushing prices even lower,” McGonegal said.

Andrew Fung, executive director of Hang Seng Bank, thought the market expected two or three increases of 25 basis points.

“I think this cycle is gradual and very slow - perhaps the Fed fund [rate] will be 2 per cent by the end of 2017. However, a strong US dollar exchange rate may reduce the magnitude of the rate increase,” Fung said, adding that Hong Kong commercial banks might not immediately increase their rates because liquidity in the Hong Kong dollar is good.

READ MORE: How will the US rate hike affect Hong Kong banks?

“Hong Kong dollar commercial lending rates will stay stable and it may take 6 to 9 months before Hong Kong dollar rates rise,” Fung said.

Stephen Innes, Senior Trader at OANDA Asia Pacific, said the many headwinds faced by the global economy – from China’s economic slowdown to the crisis in the Eurozone - meant traders were unsure of the trajectory of further rate movements.

“My view is that a 0.25 per cent rise with an accompanying statement ‘should’ lean dovish with the rate hike cycle to be no more aggressive than 0.75 per each year over a two-year period,” Innes said.

“There is much uncertainly emerging in China, especially with the market now leaning towards further weakness in the RMB. The impact of a Fed rate hike will fall back to the impact on China’s capital outflows. And while I feel that a 0.25 per cent hike in US rates will have some negative effect, it is unlikely to have any major effect,” Innes said.

Additional reporting by Reuters, Bloomberg and Associated Press