What The Fed Rate Hike Means For The Markets And Investors

The Federal Reserve announced this week that it’s raising rates by 50 basis points. The Fed raised its main interest rate by half a percentage point for the first time in over two decades. And, while a raise in rates is not usually cause for celebration, Wall Street rallied immediately following the news—just before sliding down a slippery slope and falling once again.

Jerome Powell

Chairman Jerome Powell’s comments were a culprit in causing the initial climb, having noted that the Fed wasn’t considering raising rates by 75 basis points in future months. After all, investor concerns surrounded the central bank potentially raising rates by an even bigger increase of three-quarters of a percentage point during this FOMC meeting.

Shortly after Powell downplayed the likelihood of an even greater jump, the Dow and S&P 500 ticked up to their highs of the day. On Wednesday, the S&P 500 jumped about 3%, posting its best day in nearly two years. The Dow was up 2.8%, and the Nasdaq Composite was up 3.2%.

Energy

Energy was the top-performing industry, trailed by financial stocks, technology stocks and the communication services and information tech sector.

“It’s certainly heady days when the market doesn’t blink at the most aggressive rate hike in 22 years, but keep in mind this was extremely well-telegraphed and priced in,” Mike Loewengart, managing director of investment strategy at E-Trade, said, according to CNBC.

Heading into the meeting, DataTrek’s Nicholas Colas called the market’s set-up “is a near carbon copy” of the last two meetings. The S&P 500 jumped between 5.2% and 6.3% in the one to two weeks following those meetings. So this relief rally doesn’t come as a huge surprise for investors.

However, relief rallies, like in the past, don’t always last long. What followed on Thursday was far from ideal, with major losses for the S&P 500 and NASDAQ NDAQ 100, falling 3.6% and 5.0%. Times are too uncertain to predict market moves.

Powell said at his press conference: “Inflation is too high, and we understand the difficulties it is causing, and we are moving quickly to bring it down.” He also said that “the surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is creating additional upward pressure on inflation.”

But he added that, despite it all, he believes “we have a good chance to have a soft or softish landing, or outcome if you will” for the economy—pointing to a resilient labor market and the many households and businesses that, nonetheless, have stuck in “strong financial shape.”

The central bank also added that “COVID-related lockdowns in China are likely to exacerbate supply chain disruptions,” and that “the Committee is highly attentive to inflation risks.”

So what does this mean for investors?

Of course, inflation decreases the value of your dollar so, as it rises, your money can buy less and less. That’s why the Fed is working to fight it and bring down inflation. One of the ways it does that is raise interest rates. When the central bank implements these rate hikes, your borrowing costs increase, which discourages lending and spending. Ultimately, the intention is to stifle inflation.

But, while this is all happening, rate hikes tend to affect the markets because they tend to affect how investors feel about the markets. When the Fed announces a rate hike, some traders may choose to abandon ship for more defensive positions—though we don’t recommend trying to time the markets or running at the first sign of uncertainty.

In this case, when the markets rallied in relief given the chairman’s indication that there won’t necessarily be larger rate increases. Nevertheless, however, they came crumbling down again.

About E. J. McKay

E.J.McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.