8. DECENT WORK AND ECONOMIC GROWTH

Fed Authorizes Biggest Interest Rate Hike In 28 Years, As Experts Worry Its Fight Against Inflation Will Spark Recession – Forbes

Written by Amanda

Topline

The Federal Reserve on Wednesday instituted the largest interest rate hike in 28 years as it escalates its fight against the worst inflation in four decades and fends off criticism that it moved too slowly in easing pandemic-era stimulus measures, driving experts to increasingly question whether the economy is headed toward a recession.

Key Facts

At the conclusion of its two-day policy meeting, the Federal Open Markets Committee said Wednesday afternoon, it would raise the federal funds rate, which is the target interest rate at which commercial banks borrow and lend reserves, by 75 basis points to a target range of 1.5% to 1.75%.

Though Fed Chair Jerome Powell said last month that officials were not “actively” considering a 75-basis-point hike—and would instead institute another half-point hike—investors started pricing in the biggest rate increase since 1994 after last month’s annual inflation reading unexpectedly hit a 40-year high of 8.6%.

Fed policymakers started raising rates in March, as they had signaled for months, but expectations for the pace and intensity of future rate hikes have grown more aggressive amid stubborn price gains and criticism that the central bank waited too long to start the hikes.

Rate increases make borrowing more expensive and help combat inflation by tempering demand, but “growing fears” that the hikes will spur a recession by undercutting economic growth are the “driving forces” behind recent market weakness, analyst Tom Essaye of the Sevens Report told clients in a Tuesday note.

Crucial Quote

“Whether the Fed’s actions lead to a marked slowdown or an outright contraction will become clear over the quarters to come,” Andrzej Skiba, head of fixed income at BlueBay Asset Management, said in emailed comments Wednesday, noting the Fed “cannot afford to be seen as behind the curve when its inflation-fighting credibility is under question” and adding: “A lot will depend on whether inflation responds quickly enough.”

What To Watch For

The Fed’s next policy meeting concludes on July 27, two weeks after inflation data for June is set to be released. In a note to clients this week, Goldman Sachs economists said they now expect the Fed will hike rates by another 75 basis points in July. The new expectations imply a “meaningful further drag on growth that goes somewhat beyond what policymakers should be targeting to have the best chance of bringing down inflation without a recession,” they said.

Key Background

The economy quickly and bounced back after the Covid-19 recession in 2020, but the Fed’s withdrawal of pandemic stimulus measures this year has hit stocks and sparked renewed fears of a recession. Uncertainty has come to a head in recent weeks, with all major stock indexes plunging into bear market territory this week, and the U.S. economy unexpectedly shrinking 1.4% last quarter. “The Fed’s job gets more challenging by the day with inflation at a new 40-year high, coupled with a broader weakening of the economy,” said Danielle DiMartino Booth, the CEO and chief strategist of Quill Intelligence, cautioning the central bank is “flirting with an accident waiting to happen.”

Surprising Fact

After climbing nearly 27% last year, the S&P is down 21% this year, and the tech-heavy Nasdaq has plummeted 30.5%.

Further Reading

Here’s How Markets Reacted Last Time The Fed Hiked Rates By 75 Basis Points (Forbes)

Stock Market ‘Carnage’ Set To Worsen As Fed Rate Decision Looms—Here’s How Bad It Could Get (Forbes)

Source: forbes.com

About the author

Amanda

Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai