As investors prepare for a recession, the Fed raises interest rates by 75 basis points once more

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Last Updated on July 28, 2022 by Bitfinsider

In an effort to help cool the country’s stubbornly high inflation, the Federal Reserve increased interest rates by another 75 basis points on Wednesday. Experts are growing increasingly concerned that the change in monetary policy may cause the economy to enter a recession, if it hasn’t already.

The Federal Open Markets Committee announced Wednesday afternoon that it had unanimously decided to raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 75 basis points for the second time in a row, to a target range of 2.25 percent to 2.5 percent, at the conclusion of its two-day policy meeting.

Even while the labor market has continued to exhibit “strong growth” in recent months, officials admitted in their statement that consumer spending and corporate activity have “softened.” However, they added that they are still “very vigilant” to inflation threats.

Despite Fed Chair Jerome Powell’s statement that policymakers were not “actively” discussing a 75-basis-point increase in May, markets started pricing in the largest rate increases since 1994 when the annual inflation readings for May and June unexpectedly touched fresh 40-year highs.

Despite persistent price increases and criticism that the central bank waited too long to begin the hikes, Fed policymakers started raising rates in March as they had hinted they would for months. At one point this month, bond markets had priced in a rate hike of 100 basis points.

Rate increases are essential for containing inflation because they make borrowing more expensive and thus restrain demand. However, the “driving forces” behind recent market turbulence, according to analyst Tom Essaye of the Sevens Report, are “growing fears” that the increases will trigger a recession by undermining economic growth.

Stocks continued to rise after the announcement, with the tech-heavy Nasdaq rising 2.4 percent and the S&P 500 up roughly 1.2 percent by 2:10 p.m. EDT.

Data will likely reveal that the U.S. economy contracted for a second consecutive quarter this year, indicating a technical recession, according to Essaye, amid worries that rate hikes will reduce consumer spending. He warns that the economy “may well actually be in a material contraction” by the end of the year, not only pointing out that the National Bureau of Economic Research, which the government recognizes as the official arbiter of recessions, is unlikely to declare a recession simply because of the negative data.

The economy successfully recovered from the Covid-19 recession in 2020, but this year’s rate hikes and withdrawal of the Fed’s pandemic stimulus plans have hurt markets and reignited recession fears. Bank of America economists earlier this month joined a growing list of experts who believe that the United States will experience a recession within the next 12 months. They told clients that persistent inflation and the ensuing interest rate increases have sparked a “worrying deterioration” in the economy, particularly in the formerly booming housing market. They claimed that “The Fed has become more dedicated to using its tools to aid in the restoration of price stability, with a willingness to accept at least some pain in the process.”

The S&P 500 is down 17% this year after rising nearly 27% last year, while the tech-heavy Nasdaq is down 25%.


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Disclaimer: The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, legal, tax or other advice. Investing in or trading cryptocurrency or stocks comes with a risk of financial loss.

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