Unprecedented Rate Hike: Fed Targets Shocking 5.5% to Combat Inflation!

In his analysis for readers of AlphaBetaStock, Irving discusses the Federal Reserve’s decision to raise its five policy rates by 25 basis points. The move, aimed at returning inflation to a steady 2 percent over time, follows a precedent set in June, which also hinted at further hikes. Wilkinson also provides commentary on other potential financial strategies and how they could impact economic activity.

Key Points

1. The U.S. Federal Reserve’s Federal Open Market Committee (FOMC) has increased its policy rates by 25 basis points, leading to the highest level of policy rates since January 2001 at 5.5%. This continues the very aggressive rate-hiking cycle aimed at combating the worst inflation rates in four decades.

2. The Fed has also suggested the possibility of another rate hike within this year, reiterating the June statement that leaves room for additional rate hikes. It intends to consider various factors including the cumulative tightening of monetary policy, the delays with which monetary policy affects economic activity, and economic and financial developments in guiding the decision.

3. Despite assumptions and speculations of instant rate cuts, the Fed under the leadership of Powell, has maintained steady on its path of policy tightening, which includes keeping its quantitative tightening (QT) ongoing at the normal pace. The continued tightening comes despite uncertainty over the impact of tighter credit conditions on economic activity, hiring, and inflation.

The Fed Increases Policy Rates to 5.5% – The Highest Since 2001

Today, the Federal Reserve’s Federal Open Market Committee (FOMC) hiked its five policy rates by 25 basis points, pushing the upper limit of the policy rates to 5.5%. This is the highest it has been since January 2001. But why should this matter to you as an investor? Let’s dig into the facts and figures.

Fastest Rate Hike Cycle Since 1980

This comes after the Fed projected two more rate hikes this year. In just 16 months, the Fed has increased rates by 525 basis points. That’s the fastest rate-hike cycle since 1980 in response to the worst inflation spell in 40 years. Should this worry you? Not necessarily. The unanimous vote by the FOMC is an indication of their confidence in these measures. Their goal? To return inflation to 2 percent over time.

More Rate Hikes on The Table

Today, the Fed increased a range of key rates, including the federal funds rate target, the interest it pays banks on reserves, the interest it charges on overnight Repos, and the primary credit rate. Despite the trend in ‘insta-rate’ cuts that has been persistently discussed this year, it appears the Fed is not backing down on its rate hike strategy. Can more rate hikes be expected? Yes. The Fed has left the door open for additional increases.

Implications for the Economy and Your Investments

The FOMC notes that its approach will consider various factors, including the existing tightening of monetary policy, the time it takes for policy changes to affect economic activity and inflation, and other economic and financial developments.

With the continuing QT (Quantitative Tightening) at its usual pace, this could have implications for mortgage-backed securities and the Treasury market. But fear not; the door is equally open for a softening of these measures should the economy require it. Unsure of how to navigate these headwinds? Investing in a diverse portfolio could be the key.

What Actions Should Investors Take?

No rate cuts are currently projected for 2023. So, what does this mean for you? It’s time to reassess your investments and consider opportunities that can weather increases in interest rates. A diversified portfolio that includes growth stocks, dividend-paying stocks, bonds, real estate, and commodities offers a better chance of weathering the impact.

Remember, staying informed and making data-driven decisions is paramount in these unprecedented times. Want to stay updated with Federal Reserve’s decision on monetary policy? Sign up for updates from AlphaBetaStock’s Cheat Sheet.

Scroll to Top