Fed raises policy rate by 0.75% as it steps up fight against inflation

The Federal Reserve is accelerating the hike in key rates in the face of record inflation.

On Wednesday, the central bank announced a 0.75% rate hike, a sign that it is acting more aggressively to fight rising consumer prices. This is the first time since 1994 that the Fed has raised its rate so much.

 

The three-quarter point hike takes the federal funds rate to between 1.5% and 1.75%. The federal funds rate dictates what it costs banks to borrow money from each other. And, generally, higher interest rates mean it’s more expensive for consumers to get a mortgage, get a loan to buy a vehicle, and carry over a credit card balance.

The expected effect of these changes is that consumers will spend less and increased demand for goods – one of the drivers of inflation – will slow.

The consumer price index, a key gauge of inflation, came in at 8.6% last week on an annual basis – warmer than expected. This sparked stock market volatility at the start of the week. Notably, food price increases are at 40-year highs, while gasoline prices are also at an all-time high. On Monday, the S&P 500 officially entered bearish territory.

Market watchers say the Federal Reserve is trying to thread the needle of cooling inflation while not dragging down the economy as a whole.

“Chairman Jerome Powell and his colleagues are walking a monetary policy tightrope in the hope of averting a recession while dampening demand,” Mark Hamrick, senior economic analyst at Bankrate, said in a note.

So far, he said, the Fed’s actions have dragged stocks down and made borrowing much more expensive, especially in the housing market, where mortgage rates are now the highest in more than a decade. ‘a decade.

Hamrick has some advice on how to manage the current monetary environment: paying down debt and turning to higher-yielding savings accounts.

“In this rising interest rate environment, borrowers are advised to focus on paying down debt, prioritizing variable rate interest as with credit cards,” he said. . “A more buoyant environment is developing in terms of savings, in particular with more profitable online accounts.”

As for equity investors, Hamrick says to stay the course.

“Those with long-term investment horizons, such as retirement accounts, should be rewarded when the stock market inevitably enters a more constructive environment,” he said.