The Great Interest Hike
Market Meditations | May 5, 2022
In response to the COVID-19 pandemic, the United States used economic stimuli that seemed endless to aid their citizens and keep the economy ticking.
- At the time it felt like free money but, in fact, it came at a massive cost as now US inflation is currently at its highest level since 1981 sitting at 8.5%.
- To provide stimulus in the US, the FED printed money and pumped it back into the economy using a mechanism known as quantitative easing.
- The aim of this was to increase consumer confidence by encouraging spending thus stimulating the economy. However, this has caused high levels of inflation and the FED has now adopted a contractionary monetary policy to combat inflation.
- This means that to combat inflation, higher interest rates will be used to discourage spending.
- Yesterday, in an attempt to combat the high levels of inflation, the US Federal Reserve (FED) in their first of six major FOMC meetings announced a 0.5% interest rate hike, the highest hike in the last two decades.
- In addition, the central bank outlined a program in which it eventually will reduce its bond holdings by $95 billion a month.
- Fed Chairman Jerome Powell underlined the commitment to bringing inflation down but indicated that raising rates by 75 basis points at a time “is not something the committee is actively considering.”
Further rate hikes are expected in the following FOMC meetings. Markets are anticipating that rates will exceed 3% by early 2023 and thus markets shouldn’t be as volatile during future hikes.