The U.S. markets finished significantly higher on Wednesday after the Federal Reserve announced its long-awaited interest-rate hike, the highest rate increase since 2000.
Following the announcement, stocks immediately fluctuated. However, after Chair Jerome Powell’s press conference, the indices stabilized and gained more than 2.5 percent.
The Federal Reserve raised its benchmark overnight interest rate by half a percentage point on Wednesday and said that it will begin decreasing the central bank’s $9 trillion asset portfolio next month in an effort to decrease inflation even more.
Financial analysts argue that consumers who can effectively adapt to a rising-rate environment will more easily manage the uncertainties ahead as Powell expressed his willingness to pounce on inflation with interest rate hikes higher than March’s first boost.
In a news conference in Washington, Powell said:
“Inflation is much too high, and we understand the hardship it is causing. We’re moving expeditiously to bring it down.”
Banks are also expected to raise rates, making borrowing more expensive for individuals, corporations, and governments.
The Fed believes this will reduce demand for products and services, lowering price inflation.
In a statement, the US Federal Reserve said that although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong.
Job gains have also been robust in recent months, and the unemployment rate has declined substantially. Inflation also remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.
“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,”the statement added.
The Fed seeks to achieve maximum employment and inflation at the rate of 2 percent over the long run in the U.S.
The Committee also decided to raise the target range for the federal funds rate to 3/4 to 1 percent and decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities starting June 1.
A conservative Fed, mixed earnings from some large growth businesses, the turmoil in Ukraine, and pandemic-related lockdowns in China have all weighed on Wall Street recently, with richly valued growth equities taking the brunt of the stock.
Last month, private companies employed the fewest people in two years, according to two distinct sets of statistics, while service sector expansion unexpectedly slowed in April.
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