In its battle against inflation, the Federal Reserve made yet another move on November 2. The agency announced a Fed rate hike of 0.75 percentage point, as expected by investors. Although it was expected, it did nothing to rally the market.
The markets had been looking for some indication that this would be the last time the Fed raises interest rates so highly, but the words of Fed Chair Jerome Powell did nothing to assuage worries. While speaking at a news conference, Powell admitted that policymakers are monitoring the situation to understand just how high interest rates must be to curb high inflation.
It is the most aggressive rate of tightening of the monetary policy of the federal reserve system since the 1980s.
The Federal rate hike and future implications
The press release read, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The tone of the press release had investors hoping that the Fed policy will be favorable and that the agency will not subject markets to high hikes. Stocks even rose slightly buoyed by positive sentiment.
But all that changed in the afternoon, when Powell took to the podium and minced no words in highlighting the dire economic situation. He made it clear that the Fed rate hikes in the future will depend on what effort is needed to curb inflation.
Powell refused to put a cap on how the Fed raises interest rates stating the final destination is very uncertain and the agency will stay the course until inflation is in control.
The monetary policy of the federal system won’t be restrictive but the Fed rate hikes will take economic risks into consideration while deciding the future course of action. Powell warned that severe inflation might force the Fed to hike interest rates even higher, more than what the agency predicted two months ago.
Following the briefing, stock markets fell as investor fears affected trading. The Nasdaq Composite fell by over 3% while the S&P 500 Index fell by nearly 2.5%.
Effect of Fed policy
The recent changes in Fed policy saw investors moving away from risky assets. Oil prices rose on Wednesday as activity picked up ahead of the upcoming winter season.
The market was also buoyed by the fact that US oil inventories have seen a decline in recent times.
Analysts cautioned about a higher cost of living as the Fed raises interest rates. As interest rates for borrowing go up, it will impact businesses, which will pass on the added burden of inflation to consumers. This translates to an increase in prices across the supply chain, affecting everyone from business owners to customers.
Experts opined that small time business owners will be the hardest hit as supply chain woes and high inflation have already eaten through their profits. By raising interest rates, the Fed aims to take money out of the circulation to slow down economic stimulation.
But as record high inflation blazes through, small time business owners are struggling to stay afloat. One way to tackle this is to buy local. Although you might pay slightly higher prices, it will keep businesses afloat and pour money back into the economy. Experts also recommended that business owners must consult financial experts for advice on how to manage loans as interest rates go up.
