Key Takeaways:
• The Federal Reserve raised interest rates by a quarter of a percentage point to combat inflation, making it the ninth consecutive increase in the past year.
• The Federal Reserve hinted that they might be done raising interest rates soon and that banking-system turmoil might end their rate-rise campaign.
• Recent developments in the banking industry may lead to tighter credit conditions for households and businesses, which may weigh on economic activity, hiring, and inflation.
The Federal Reserve recently raised interest rates by a quarter of a percentage point for the ninth consecutive time to combat inflation. The increase will bring the benchmark federal-funds rate to a range between 4.75% and 5%, the highest level since September 2007. The Federal Reserve indicated that they might be done raising interest rates soon in their post-meeting policy statement. The recent turmoil in the banking industry could lead to tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation. However, the extent of these effects is still uncertain.
The decision to raise interest rates comes as a surprise since two weeks ago, the Federal Reserve suggested they would debate whether to raise rates by a quarter-point or a bigger half-point. This decision was made after reports showed hiring, spending, and inflation were stronger early this year than they thought at the time of their Jan. 31-Feb. 1 meeting.
Where does the economy go from here?
The Federal Reserve's policy decisions could affect retail investors, as the fed-funds rate influences other borrowing costs throughout the economy, including rates on mortgages, credit cards, and auto loans. The Federal Reserve has been raising rates to cool inflation by slowing economic growth. It believes those policy moves work through markets by tightening financial conditions, such as by raising borrowing costs or lowering prices of stocks and other assets. And the truth is that that is exactly what it does. I would expect demand for new homes and vehicles to possible cool as borrowing becomes tighter. If the Fed stops or otherwise pauses its rate increases, we may actually see a boom as buyers and borrowers rush to take advantage of a stop, however shortlived, in intrest rate increases.
Despite the recent turmoil in the banking industry, those with sound portfolio strategies in their IRA, brokerage, ROTH, or other investment account such as a 401(k), should feel good about their thoughtfully allocated asset strategy. The economy is still volatile, but the Federal Reserve is taking necessary steps to control inflation. It is important for retail investors to keep a close eye on the Federal Reserve's policy decisions and adjust their investment strategies accordingly. If the increase in interest rates of the recent banking collapse from institutions such as SVB or First Republic have you concerned, reach out to me right away.
