Faced with no other choice, the US Federal Reserve is expected to implement stronger measures to tackle inflation.
New Fed Chair, Jerome Powell, takes his seat with high inflation affecting the US economy. Consumer prices in the world’s largest economy surged 6.8% in November, the biggest jump in 40 years.
Consumers on both sides of the Atlantic are facing high energy, food and housing prices, driven by a cocktail of factors thrown up by the COVID-19 pandemic, oil supply crunches, and even semiconductor shortages.
Analysts expect the Fed to announce, after its meeting this week, that it will remove pandemic-era stimulus measures more quickly, paving the way for an interest rate hike before mid-2022.
While an interest rate hike is an effective inflation-fighting weapon, it could also get in the way of the ongoing global economic recovery.
What does this mean for me?
If, as expected, the Fed raises interest rates within the next two quarters, it will have the immediate effect of taming inflation, as the two market forces have an inverse relationship. However, high interest rates are not a magic pill. They reduce inflation precisely because they take the wind out of the sails of an economy as the cost of borrowing becomes more expensive and consumers spend less.
With you as a trader, the bond market may be worth investigating. Elevated interest rates will lead to bond instruments with higher yields, which is an area worth exploring as the world braces for a higher cost of borrowing.
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