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Forbes
Forbes
26 Jul 2023


The Federal Reserve on Wednesday resumed its most aggressive hiking campaign in two decades, raising interest rates to a two-decade high.

US-POLITICS-ECONOMY-POLICY

Federal Reserve chair Jerome Powell appears before Congress last month.

AFP via Getty Images

The Fed’s Open Market Committee unanimously decided at its meeting this week to bump the federal funds rate by 25 basis points to 5.25% to 5.5%, sending rates to their highest level since 2001.

In its announcement, the Fed said it will continue to “assess” the macroeconomic and fiscal backdrop, signaling further hikes may be on the horizon.

Stocks were largely flat immediately after the announcement.

The federal funds rate, which officially only determines the overnight lending rate between banks but impacts all borrowing costs from mortgages to student loans, is the U.S. central bank’s primary mechanism to combat inflation. After two years of near-zero interest rates to stimulate the economy during the pandemic, the Fed hiked rates by 500 basis points from March 2022 to this May before holding rates steady at the June meeting of its policy-setting committee. Among the biggest impacts of the hiking campaign include inflation slipping from a four-decade high of 9.1% last June to 3% last month, three of the four largest bank failures in American history after the institutions failed to properly safeguard against potential rate hikes, a noticeable uptick in layoffs at large companies and a jump in mortgage rates to their highest level since 2008.

A recession “will be necessary to bring inflation back to 2%,” Vanguard economist Andrew Patterson wrote in emailed comments Monday, predicting the Fed may need to raise rates to “6% or beyond” to rein in inflation.

The beginning of the Fed’s aggressive tightening cycle contributed greatly last year to major stock indexes’ worst year since 2008, but equities have rallied considerably so far in 2023 even as rates have continued to climb. “History shows that equity valuations are usually driven by a number of factors, of which interest rates are just one, and that the recent tightness of the relationship between multiples and rates was unusual” in 2022, Goldman Sachs strategists explained last week.

This is a breaking news story and will be updated…

Here’s How Stocks Performed After The Fed Stopped Hiking Rates In The Past (Forbes)

Nearly All Fed Officials Expect More Interest Rate Hikes Will Be 'Appropriate' This Year, Powell Says (Forbes)