US Federal Reserve Raises Rates to Reduce Inflation, Impacting Trade and Financial Sectors
By The US Federal Reserve has recently raised its policy rate by another 0.25% up to a target range of 4.50% to 4.75%, signaling that more rate hikes are likely in the coming months as the central bank works to bring inflation back down to its 2% annualized target.[0] This latest rate hike is the highest level in more than 20 years and is bad news for stocks in general, particularly for rapidly growing, unprofitable companies that need to borrow heavily to fund their expansion.
Recent empirical research using cross-country firm level data and information on input-output linkages finds that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods.[1] The study further establishes that financial considerations are influential in creating variations, with U.S. monetary policy spillovers having a considerably smaller effect on companies that are less financially restricted.[1]
This week, there has been a change in attitude about Federal Reserve policy in the interest rate options, with several large bets being placed on the central bank's benchmark rate reaching 6%, which is almost a percentage point higher than the current consensus. However, traders are seemingly waiting for a signal from inflation data to be sure that sending the dollar back above the 50-DMA is the right decision.[2]
Economists had been expecting it, and the rise in the interest rate showed that the Federal Reserve was confident that the economy was close to becoming stable, and no longer needed the help it had during the pandemic.[3] The decreased speed of growth indicates that the rate hikes are having their desired effect, inflation is decreasing and the Federal Reserve might cease raising rates shortly. Rates were right to be hesitant, as the Fed controls and sets the shortest-term interest rates in an effort to control inflation.[4]
In conclusion, the US Federal Reserve’s latest rate hike is a sign of its efforts to reduce inflation and bring the economy back to stability. The effects of this hike are felt most strongly in sectors with exposure to trade in intermediate goods, as well as in firms that are less financially constrained. This rate hike has also caused a shift in sentiment in interest-rate options, with traders betting on a rate of 6%. Inflation data will be the key factor in determining whether or not the dollar will rise above its 50-DMA.
0. “Was the US Federal Reserve’s Most Recent Hike Really That Dovish?” Move Smartly, 6 Feb. 2023, https://www.movesmartly.com/articles/was-the-us-federal-reserves-most-recent-hike-really-that-dovish
1. “How Much Can the Fed’s Tightening Contract Global Economic Activity?” Forex Factory, 13 Feb. 2023, https://www.forexfactory.com/news/1205370-how-much-can-the-feds-tightening-contract-global
2. “The 6% Bet” Action Forex, 10 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/485735-the-6-bet
3. “Federal Reserve hikes interest rates by 25 basis points” The Ticker, 13 Feb. 2023, https://theticker.org/9987/business/federal-reserve-hikes-interest-rates-by-25-basis-points/
4. “Rates Played Chicken With The Fed (And Lost)” Mortgage News Daily, 10 Feb. 2023, https://www.mortgagenewsdaily.com/markets/mortgage-rates-02102023
