In its battle against inflation, the Federal Reserve made another move on November 2. The agency announced a 0.75 percentage point Fed rate hike, as investors expected. Although expected, it did nothing to recover the market.
Markets had been looking for any indication that this would be the last time the Fed raises interest rates that much, but words from Fed Chairman Jerome Powell did nothing to quell concerns. While speaking at a news conference, Powell admitted that policymakers are monitoring the situation to understand how high interest rates need to be to curb high inflation.
It is the most aggressive rate of monetary policy tightening by the Federal Reserve System since the 1980s.
The Federal Rate Increase and Future Implications
The press release said: “The Committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance that is restrictive enough 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’s policy would be supportive and that the agency would not subject markets to sharp gains. Stocks were even slightly higher, buoyed by positive sentiment.
But all that changed in the afternoon, when Powell took the podium and pulled no punches in highlighting the dire economic situation. He made it clear that future Fed rate hikes will depend on how much effort is needed to curb inflation.
Powell refused to put a cap on how the Fed raises interest rates, saying the ultimate fate is highly uncertain and the agency will stay the course until inflation is brought under control.
The monetary policy of the federal system will not be restrictive, but the Fed’s rate hikes will take into account economic risks when deciding the future course of action. Powell warned that severe inflation could force the Fed to raise interest rates even higher than the agency predicted two months ago.
After the briefing, stock markets fell as investor fears weighed on trading. The Nasdaq Composite fell more than 3%, while the S&P 500 index fell almost 2.5%.
Effect of Fed Policy
Recent changes in Fed policy have caused investors to move 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 of late.
Analysts have warned of a higher cost of living as the Fed raises interest rates. As interest rates on loans rise, it will hit businesses, passing the additional burden of inflation onto consumers. This translates into higher prices throughout the supply chain, affecting everyone from business owners to customers.
Experts opined that small business owners will bear the brunt as supply chain problems and high inflation have already eaten into their profits. By raising interest rates, the Federal Reserve aims to take money out of circulation to slow down economic stimulation.
But as record inflation soars, small business owners are struggling to stay afloat. One way to approach this is to buy local. Although you may pay slightly higher prices, it will keep businesses afloat and put money back into the economy. Experts also recommended that business owners consult financial experts for advice on how to manage loans as interest rates rise.