The Fed Announces Second Massive Interest Rate Hike

A few months ago, a massive 75-basis-point rate hike by the US Federal Reserve was unthinkable. It has now happened twice in a row. This week, members of the US Fed unanimously agreed on an additional interest rate hike of three-quarters of a percentage point. 

The unprecedented action shows how far the Fed is willing to push the economy to dampen rising costs amid the highest price increases for many decades. Recent indicators of spending and production have softened in the US, even if job numbers have been more promising. The unemployment rate is close to a 50-year low.

The Fed must execute a delicate balancing act, or its strategy could slow economic growth while inflation is still rising. Analysts point to the fact that in the last 11 monetary tightening cycles, the Fed has only successfully avoided recession three times. During each of those escapes, inflation was lower than it is today.

What does this mean for me? 

When the COVID-19 pandemic first arrived, the Fed slashed its interest rate to zero to support the economy and make money almost free to borrow. However, the easy access to cash encouraged spending by households and businesses, but also fueled inflation.

Inflation is still elevated today, reflecting supply and demand imbalances related to the pandemic, as well as higher food and energy prices, exacerbated by Russia’s war with Ukraine. Diversified investors must now wait to see if the Fed’s action will cool the economy and tame inflation.