Fed Raising Interest Rates and Struggling to Bring Down Inflation
By It has been over a year since the US Federal Reserve (Fed) began raising interest rates from near zero to a range of 4.5% to 4.75%, and the central bank appears poised to take it as high as 5.4% by midyear.[0] The Fed has been tightening monetary policy in an effort to bring down inflation, which is currently at 6.4%. Wall Street firms, including Deutsche Bank, UBS, Bank of America, and Goldman Sachs, have been warning that the Fed will hike interest rates by more than previously anticipated.[1]
The Fed has been trying to bring inflation down to its long-term target of 2%.[2] But recent economic data show stubborn inflation and a hot job market, displeasing policymakers at the Fed who have said in recent speeches that more rate increases are needed.[3] To combat this, the Fed is reducing its balance sheet each month by about $100 billion, essentially sucking liquidity out of markets.[4]
Stock pickers have been struggling to make it through the 2023 faltering recovery, as a swift reassessment of how high the Federal Reserve will raise interest rates this year rocked the bond market once again.[5] Investors are taunting the Fed with crypto, meme stocks, and unprofitable companies responding best to Fed communications. But Federal Reserve officials show no sign of pivoting away from rate hikes, and they believe “ongoing” interest rate increases are necessary, with some wanting to increase rates by 50 basis points.[6]
Hence, it may be wiser to take note of more recent comments from Federal Reserve officials, like Loretta Mester and James Bullard, who both suggest a 0.50% increase.[6] Bullard even thinks the US economy can remain aloft despite the turbulence caused by higher interest rates.[6] Investors should take some comfort from indications that, despite the Federal Reserve's hawkishness, a no-landing outcome is likely.[6] CNBC Daily Open suggested that the economy might be fine with inflation higher than 2%.[7]
0. “Investors Stung by Treasuries Rout Brace for Next Fed Blow” Yahoo! Voices, 21 Feb. 2023, https://www.yahoo.com/now/investors-stung-treasuries-rout-brace-110000096.html
1. “Why stocks are up despite the risk of tighter monetary policy” TKer by Sam Ro, 17 Feb. 2023, https://www.tker.co/p/stock-market-supported-by-earnings-growth
2. “CNBC Daily Open: Markets Fall as the Fed Shows No Sign of Pausing Interest Rate Hikes” NBC 10 Philadelphia, 23 Feb. 2023, https://www.nbcphiladelphia.com/news/local/cnbc-daily-open-markets-fall-as-the-fed-shows-no-sign-of-pausing-interest-rate-hikes/3506936/
3. “Retail Investors Are Shrugging Off The Fed's Rate Hikes” Investopedia, 20 Feb. 2023, https://www.investopedia.com/retail-investors-are-shrugging-off-the-fed-s-rate-hikes-7111439
4. “The stock market is flipped upside down as traders defy Fed, chase risk” Markets Insider, 18 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-trends-flipped-upside-down-investors-defy-fed-2023-2
5. “A One-Way Market Foils Stock Pickers as Fed Trounces Everything” BNN Bloomberg, 25 Feb. 2023, https://www.bnnbloomberg.ca/a-one-way-market-foils-stock-pickers-as-fed-trounces-everything-1.1888217
6. “CNBC Daily Open: Markets fall as the Fed shows no sign of pivoting away from interest rate hikes” CNBC, 22 Feb. 2023, https://www.cnbc.com/2023/02/23/stock-markets-the-fed-shows-no-sign-of-pivoting-away-from-rate-hikes.html
7. “CNBC Daily Open: Markets Fall as the Fed Shows No Sign of Pivoting Away From Interest Rate Hikes” NBC 5 Dallas-Fort Worth, 22 Feb. 2023, https://www.nbcdfw.com/news/business/money-report/cnbc-daily-open-markets-fall-as-the-fed-shows-no-sign-of-pivoting-away-from-interest-rate-hikes/3200496/
