As expected, the Federal Reserve raised interest rates today by another 0.25-basis point. This then brings interest rates to 5.25%. This new round of rate hikes market its tenth straight increment since March 2022, as inflation remains stubbornly high. The increase may be its last for now, as policymakers suggest that further moves not be necessary.
Central bankers lifted rates to a range of 5% to 5.25%, a level they have not reached since the summer of 2007. The move capped the fastest series of rate increases since the 1980s, as the central bank led by Jerome Powell attempts to slow the economy weigh down price increases. When asked whether Fed staff still expect a mild recession, Chairman Powell said that while he would wait for the minutes to show specifics, that the forecast was “broadly similar to that. When asked about the debt limit, he replied: “From our standpoint, it is essential that the debt limit is raised in a timely way.” He noted that the Federal Reserve does not give advice to politicians, but it’s very important that this be done.
The new incrementation in interest rates will lead to an even tighter credit market. While inflation remained elevated, higher borrowing costs for households and businesses are likely to weigh on economic activity, hiring, and inflation. In the statement announcing the rate hike, it added that job gains had been robust in recent months and noted that the unemployment rate remained low. The latest decision comes at a fraught moment as high prices, high-interest rates, and slowing economic growth would all seem to spell an economic downturn.
Stock Market Plummets after Fed's announcement
Source: Yahoo Finance
Following the announcement of the rate hike, the stock market plummeted. On Wednesday, the Dow closes more than 250 points lower, or 0.80% to end at 33,414.24 points. The S&P 500 dropped 0.70% to close at 4,090.75, and the Nasdaq Composite slid 0.46% to close at 12,025.33. Government bonds fell sharply. The yield on the 10-year note dipped down to 3.35% while the two-year note yield slipped to 3.85%. Oil prices tumbled as well—futures for West Texas Intermediate, the U.S. benchmark, dropped more than 4% to $68.22 a barrel. The SPDR S&P Regional Banking ETF (KRE) declined more than 1%.
Indeed, U.S. stocks ended lower this Wednesday, reversing gains, which left investors wondering what the U.S. central bank’s next move would be with interest rate hikes. In addition to raising the target range for its benchmark interest rate by 0.25%, the Federal Reserve left its option for June, saying future rate hikes would be dependent on the impact of previous rate hikes on the economy. This news makes investors more nervous than they otherwise anticipated. As investors are becoming nervous due to a tighter credit market and the possibility of another rate hike next month, the price of investments may be on a consistent decline. The market will adjust its behavior to the possibility of rate hikes in June, this means that investors may hold off on making new investments as the cost of these investments is becoming pricier.