Grace, from your Investor Relations team, covers the Fed's historic interest rate hike.
Last Friday’s inflation report was a lot worse than expected, as consumer prices accelerated by 8.6 percent in May. This was the fastest growth rate since 1981. Consensus following the data was clear: the Fed needed to do something drastic to curb prices, and fast.
On Wednesday afternoon, Fed Chairman Jerome Powell elected to raise interest rates by three quarters of a percent. The change is the largest interest rate increase in 28 years and is an aggressive move to anchor inflation back to its 2% target. The move strays away from the Fed’s traditional 25 basis point pattern… but then again, the current state of the economy is anything but traditional.
The Federal Reserve’s north star is taming inflation and we think Wednesday’s move is a good start. Why? Because by raising rates, the cost of borrowing money is higher. Higher interest rates make consumers and businesses hold off on making large purchases, thereby cooling off demand and theoretically calming prices.
Interest rates have already doubled this year, and they’re not done – the market is currently projecting that rates will double again by year’s end.
The Fed’s role can only really control the demand side of the equation. Their ability to get inflation under control is highly dependent on the unknown - where supply goes from here.
Let’s not forget record high energy prices spurred by the War in Ukraine, a persistent covid hangover and a stalled supply chain aren’t doing anyone any favors. And three quarters of a percent is supposed to solve all of that? We’ll see.
Fed Chair is a job we do not envy – to lower inflation, keep the economy out of a recession all while limiting job losses is an equation that is far from easy. We think Wednesday's move is a step in the right direction, and we’ll be following closely.
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