Fed Goes Hawkish Again

Weekly Market Snapshot

• US Federal Reserve Increases Rates to Highest Level in Decades

 Behind the Headlines: What happened?

The Federal Open Market Committee (FOMC) of the United States announced its much-expected decision on Wednesday to raise interest rates by 25 basis points, taking borrowing costs to a historic range of 5.25%-5.5% as analysts continue to brace themselves for when the brake pedal would be applied by the Fed. This economic decision came after the two-day July FOMC meetings concluded on July 26th, though the news had a pinch of salt effect as it had been priced by the market.

Chairman Jerome Powell announced the FOMC’s decision to increase the interest rate by a quarter percentage point (0.25%) which was unsurprising as inflation continued to slip off the fingers of the 2% preferred rate by the apex bank.

The Inside Scoop:

The rate hikes are expected to reduce the purchasing power of the people because, as interest rates rise, it becomes more expensive and unattractive for people to borrow. A pain in the jaw for Americans? Safe to say it certainly would be as this causes disposable income to head south and it is advisable that consumers brace themselves for an uptick in lending costs.

Connecting the Dots:

Against these realities, the global financial markets remain puzzled as all fingers remain crossed for policymakers decisions in subsequent meetings if prices remain above its target rate of 2%. However, this historic rate hike campaign seems to have been justified in slowing prices even as economic growth has remained positive despite the rate increases.

The Fed acknowledged that the US inflationary pressures remain of concern and more assurances of prices declining needs to be seen in the coming weeks before pressing the pause button on rates.

The Bottom Line:

In drawing a connection between the US rate hike and other economies, financial markets in other countries could be exposed to the risk of increased capital outflow. Hence, this presents a silver lining for the US anchored on the attraction to its economy and an outflow of funds from other developed and emerging markets.

Furthermore, the higher yield environment and stable currency gives the US an edge because the rate hike means a stronger dollar against most of the world’s currencies.

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