The Actions of the Fed

The US federal reserve held its regular meeting this week, and as widely expected, increased short-term interest rates by 3/4 of a percent. This was done to help combat the high level of inflation. This action brings the fed-funds benchmark interest rate to a range between 2.25% and 2.5%. During the post-meeting interview, Fed chairman Jerome Powell stated: "the current picture is plain to see: The labor market is extremely tight, and inflation is much too high."

Inflation, which is commonly measured by the consumer price index, or CPI, includes a basket of goods and services consumers, on average consume. Some of the main components include food, energy, and shelter.

Inflation can occur in an economy when there are too many dollars chasing too few assets. This is a supply and demand imbalance that can drive prices higher, thereby creating inflation. The actions of the Fed are aimed at driving the supply of money lower, including borrowing or credit in the economy, to help improve this imbalance. Interest rates have been held low since early 2020, a time when lower rates were designed to stimulate economic activity. An important takeaway here is that these recent fed actions are done to get interest rates back to longer-term average levels.

Now let's talk about the size of this interest rate increase. This move to hike rates by 3/4s of a percent is a large move. The Fed is taking strong action to combat inflation now, while also attempting to not slow down the economy too much. We consider this rate hiking cycle to be front-end loaded meaning there have been large moves made early on. More increases are still expected.

Although this increase was widely expected, stock markets moved higher following the announcement and press conference.

Let's now check in on how the US stock market has performed this year. Through nearly the first seven months of the year, the stock market is down about 15%, which is an improvement from the down 23% we saw in mid-June.

Stock price movements over this short time period have been quite substantial. The near term is always uncertain, which is why we advocate using a bucket-based approach to planning and investing. This means setting aside near-term dollars in more stable investments while looking for growth opportunities with long-term dollars.

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