Jason Ryan, Staff
Facing both chaotic financial markets and raging inflation, the Federal Reserve indicated it could soon raise interest rates for the first time in more than three years as part of a broader tightening of historically easy monetary policy.
In a move that came as little surprise, the Fed’s policymaking group said a .25 percentage point increase to its benchmark short-term borrowing rate is likely coming. It would be the first increase since December 2018.
Chairman Jerome Powell added that the Fed could move towards a more aggressive path, stating, “I think there’s quite a bit of room to raise interest rates without threatening the labor market… sooner…and perhaps faster.” These comments were made at his post-meeting news conference.
This was not the message investors were hoping for. That being said, the major stock market averages turned quite negative shortly following Powell’s statement. Investors have ineffectively been trying to guess what is going on with the Fed for weeks. Still, Powell said the Fed and investors were on the same page.
The Dow turned negative, falling 70 points. The index had been up as many as 500 points earlier Wednesday. The S&P 500 and Nasdaq gave up some of their gains as well. The S&P 500 was up just .01 percent and the Nasdaq rose 0.6 percent. In addition, bond yields rose following the Fed’s statement. The yield on the 10-year Treasury rose to 1.8 percent from 1.78 percent from late Tuesday.
Pressure from inflation on businesses and consumers is what is driving the Fed to raise interest rates this year. There is some concern on Wall Street that the central bank will raise interest rates this year more than the four times that which most economists currently expect.
Since the COVID-19 pandemic erupted in 2020, investors have poured money into stocks, confident that the central bank would help keep share prices upright. With that support going away, markets have been hit with a spell of volatility. The S&P 500 is down 7.3 percent so far this year, while the Dow is off 6 percent. The Nasdaq Composite has also fallen 11 percent. The Federal Reserve’s announcement for its soon hike in interest rates has been attributed to an unstable market seen last week. With this news, it is interesting to see what is to happen in the coming weeks.