Fed makes biggest rate hike in two decades as high inflation looms

On Wednesday, the Federal Reserve leveled up its move against high inflation by raising interest rate by half a percentage point,  its most significant interest hike since 2000.

Although the interest hike is an aggressive move on Fed’s part, it proposed a detailed plan to reduce their huge bond holdings. The Fed will continue working to balance the economy to keep up with this massive price increase in four decades.

In the news conference, Fed Chairman Jerome Powell said, “Inflation is much too high, and we understand the hardship it is causing. We’re moving expeditiously to bring it back down.” He also mentioned how low-income people are struggling with inflation. “We’re strongly committed to restoring price stability.”

⚠️BREAKING:

*FEDERAL RESERVE HIKES INTEREST RATE BY 50BPS, LARGEST INCREASE SINCE MAY 2000

🇺🇸🇺🇸 pic.twitter.com/pbpKNf1M5s

— Investing.com (@Investingcom) May 4, 2022

Analyzing the Fed chairman’s comments, it is more likely that 50-point rate hikes are ahead. However, it won’t be anything as aggressive as this recent increase. Aside from the Fed funds connection to different adjustable-rate consumer debt, these funds also set the rate banks charges for short-term lending.

Alongside the tactic of raising interest rates, the Central Bank imposed that they would begin slashing asset holdings on its $9 trillion balance sheet. While the Fed kept on acquiring bonds to keep money flowing during the pandemic crisis and keep interests at low rates, the increase in prices forced Fed to make a new move in monetary policy.

Markets have foreseen and already prepared for these moves. However, it had been volatile all year round. Through these uncertainties, investors have been dependent on Fed as their partner ensuring markets would still function well. But the high inflation has prompted tightening.

Today is FOMC.

Today is also a good reminder that numerous members of the Federal Reserve got caught trading stocks the Fed was buying in 2021.

They were banned from trading, resigned, and sold at the very market top before the Fed signaled it was raising rates. pic.twitter.com/zfnwr5Jc5e

— unusual_whales (@unusual_whales) May 4, 2022

Future Positive Results of Fed interest hike

This Wednesday’s hike will raise the federal funds rate to 0.75%-1%. At the same time, the current market price has the rate increase to 2.75% – 3% by the end of the year.

On a positive note, investors still shed some light on the recent hike. While the high increase is in place, Powell also said that significant large increases would be “on the table” at Fed’s future meetings. Powell immediately swept the doubts that policymakers were looking into a more substantial move which some investors feared to happen likely.

Powell’s reassurance sent the stocks surging. The S&P 500 soared by 3 percent, its most significant rise since May of 2020.

BREAKING: Federal Reserve raises interest rates by 50 basis points, further tightening markets

— Bitcoin Magazine (@BitcoinMagazine) May 4, 2022

The Wall Street people were fearfully monitoring the fed’s moves in its fight against inflation. They are worried that officials might reduce demand to a high level, resulting in an economic recession. Fed has been getting monetary help for decades now. And Powell’s comments implied that the central bank was moving to embark on a brisk course. However, it will not be a drastic move.

Moreover, policymakers hoped that inflation would calm down last year as supply shortages were met, and the economy was on average after the pandemic. However, when normalcy was setting, inflation accelerated more. It is due to the war in Ukraine and the new lockdowns happening in China. These events further elevated the supply shortages and resulted in price increases for fuel, goods, and food.

Possible Effects on the Economy

In contrast, the labor supply shortage and wage increases are rapidly happening in the US. These contribute to higher prices for goods and services. While consumer demand remains at its peak.

Powell noted that the recent events in Ukraine and China are significant inflation factors. “They’re capable of preventing further progress in supply chain healing or even temporarily worsening supply chains.”

The Fed’s move of interest hike will make a blow out of the financial markets. Bond prices will drop, which will make yields increase, and stocks will become less attractive. However, this could result in the rolling downs of the housing market by going for longer-term borrowing prices.

Cox Automotive chief economist Jonathan Smoke wrote in a note after the meeting. “This is exactly what Fed wants to see. As demand for homes, cars, and other durables declines in response to declining affordability, the price increases should also slow.”

Inflation can slow down once higher financing costs and less shopping occur, resulting in slower business extensions. If companies would hire less, demand for labor will wane. Then, wage increases will slow down, which can further slow demand. All of these will help weigh down prices.