The Federal Reserve is believed to increase its interest rates for the very first time since 2018, as executives try to temper inflation, which is at its worst annualized pace in 40 years.
A tight labour market, supply interruptions, skyrocketing inflation, and moreover Russia’s attack on Ukraine have clouded the future and aggravated price as well as supply chain constraints that many had believed would subside soon.
Effect on Stock Market
The possibility of Fed raising rates has pushed the Nasdaq Composite into its deepest bearish trend since 2008. The major indexes recovered on Wednesday prior of the Fed decision, but the Nasdaq, which is heavily weighted in technology, is still down nearly 19% over its highs. It has already been in a deep recession for 79 trading days, and it is on track to break the duration of the 2018 bearish trend this Friday.
According to Dow Jones Market Data, this would be the worst market correction since the financial crisis of 2008. This year’s exodus from tech equities, especially those with greater valuations, has been fueled by strong inflation as well as the Federal Reserve’s move to increasing interest rates.
Economists’ Forecast for Interest Hike
Economists predict the Federal Reserve may have to modify higher its inflation forecast for 2022 as core component of its periodic forecasting exercise on Wednesday, after being taken off guard by the quick rise in prices.
At the Federal Open Market Committee conference held in December, the Fed estimated that total price pressures, as measured by the personal consumption expenditures price index, would climb by 2.6% this year, with core prices, excluding food and energy, rising by 2.7%. Persistent supply chain disruptions, and ongoing indications of significant demand pressures, and skyrocketing and fluctuating energy prices due to Russia’s invasion on Ukraine, most think that those projections need to be raised.
When Federal Reserve Chairman Jerome Powell addressed legislators in Congress earlier this month, he effectively locked in the Federal Market Committee’s option and stated that “I do think it will be appropriate to raise our target range for the federal-funds rate at the March meeting in a couple of weeks. I’m inclined to propose and support a 25-basis-point rate hike.”