The Federal Reserve increased interest rates by 0.25% on Wednesday (3/22) to handle two contrasting matters: the potential for inflation to persist at a high level and the possibility of banking system turmoil leading to a significant economic slowdown. The Fed increased interest rates to a range of 4.75 percent to 5 percent by increasing the cost of borrowing, and it was forecasted that there would be an additional rate increase in 2023. However, policymakers gave a hint of uncertainty about the rate hike. This action was taken to convey that policymakers were attentive to both financial risks and the ongoing battle against inflationary pressures. According to Jerome H. Powell, the Fed chair, at the press conference, further hikes, incoming data, and the evolving outlook will be their main focus. However, the Fed's movement can slow the economy and possibly trigger a recession. It increases the growing cost of credit cards, auto financing, and loans. In addition, The Fed suffered a complicated situation due to the banking crisis, Silicon Valley Bank’s bankruptcy, which affected the economy. According to The Fed, current situations in the banking sector are most likely to result in tighter credit conditions for households and businesses and weigh on economic activity, employment, and inflation.
The Fed’s rate hike has impacted many economic sectors, especially the stock market. After the announcement, stocks on Wall Street skidded lower in late trading on Wednesday (3/22) and refused the decision. The S&P 500 initially jumped 0.9% after announcing the decision before falling sharply toward the end of trading, finishing 1.65 percent lower for the day. Followed by The Dow Jones Industrial Average, which tumbled by over 500 points, or 1.63%, the S&P 500 saw a larger fall of 1.65%, and the Nasdaq Composite declined by 1.6%. Furthermore, the two-year Treasury yield, sensitive to changes in interest rates, fell sharply to below 4%. Following Wall Street's reaction, similar occurrences happened in Asia-pacific, where markets were mixed on Thursday (3/23). Hong Kong’s Hang Seng index led gains in Asia, up 2.11%; China’s Shanghai Composite closed up 0.64% to end the day at 3,287, while Australia’s S&P/ASX 200 was down 0.61% to close at 6,973. On the other hand, currencies in the Asia-Pacific, such as the Japanese yen, the Korean won, the Australian dollar, and China’s yuan strengthened against the greenback as the U.S. dollar index fell to 102 after the Federal Reserve raised rates and hinted at an end to its rate hike cycle.
As The Fed keeps raising interest rates to restrict the economy and slow inflation, it stresses the financial system that now could apply even more pressure on the economy, removing some of the need for the Fed to keep raising interest rates. According to George Goncalves, head of US macro strategy at MUFG Securities, the interest rates are viewed as either the last or close to the last hike, and The Fed will be aggressive on inflation. Reeling from the series of bank collapses that prompted intervention from regulators worldwide and generated violent swings in financial markets, investors, analysts, and economists had been left guessing what the Fed might do in the future. However, Gilbert Garcia, managing partner at Garcia, Hamilton, and Associates, conveyed that The Fed is making a major miscalculation on raising interest rates by 25 basis points. With all the leading indicators that seem to suggest that the US economy may be headed for a recession, the decision made by The Fed is considered too far and too fast. With all current occurrences, Powell stated that it could have an effect comparable to a rate increase "or even greater," but he consistently warned that the effect on the economic forecast was unpredictable.
Sources:
Bloomberg CNBC
The New York Times
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