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The decision of the Federal Reserve to raise its benchmark interest rates three-quarters of a percentage point caused US stocks to advance.
Stocks rallied in the US on Wednesday after the Federal Reserve increased interest rates by 75 basis points. This hike, the largest in twenty-eight years, represents the US central bank’s latest attempt to contain surging inflation. Commenting on the interest rate hike, Fed Chair Jerome Powell said:
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common.”
However, the Fed also hinted that it could further increase rates by next month if necessary. “We want to see progress. Inflation can’t go down until it flattens out. If we don’t see progress … that could cause us to react. Soon enough, we will be seeing some progress.” Powell explained.
The governing bank’s unreserved attitude toward inflation demonstrates steadfast commitment to bringing inflationary levels under control. According to Charlie Ripley of Allianz Investment Management, the Fed is on top of the situation:
“Today’s announcement confirms the Fed’s commitment to fight the inflation battle more aggressively despite the potential aftermath from raising rates at such a rapid pace.”
Ripley also suggested that markets would remain appeased for a while after the rate hikes.
Aggressive Federal Reserve Stance on Inflation Pushed Indexes, Stocks Higher
The general stock market climbed, with all three major indexes advancing their positions in response to the development. For instance, the Dow Jones Industrial Average snapped a five-day losing streak, climbing 303.70 points, or 1%, to close at 30,668.53. In addition, the tech-heavy Nasdaq Composite rose 2.5% to finish at 11,099.15, while the S&P 500 gained 1.46% to 3,789.99. Although stock movements were volatile, they hit highs during the trading session.
Observers, analysts, and investors had anticipated the aggressive Fed hike. However, the central bank’s willingness for repeat increments surprised many. Commenting on the situation, LPL Financial asset allocation strategist Barry Gilbert stated:
“The more aggressive stance can still be consistent with a softish landing for the economy, but the path is getting narrower. We still think the Fed may be able to back off from its new forecast of a 3.4% benchmark rate at the end of the year, but for now, the priority is showing resolve.”
Fed 2022 GDP Outlook & 2023 Optics
In tandem with its substantial rate hike, the US Federal Reserve also slashed its GDP outlook for the year to a 1.7% gain. This reduction is from the 2.8% figure that the governing bank had projected back in March. Furthermore, the Fed’s projected inflation outlook grew from 4.3% to 5.2% this year. Despite this, the Federal Open Market Committee expects inflation projections to pare down in 2023.
The Committee also expressed optimism about the state of the economy next year, despite higher inflation. According to the FOMC, there was an upswing in overall economic activities after the lull from the first quarter. The Committee also stated that there was a significant increase in job gains over the last few months. In addition, it said the unemployment rate also remained low in that period.