U.S. Fed Rate Hikes: What it means for Global Markets
The year 2022 has sparked hope for the world economy ever since experts projected it as the Year of Global Economic Recovery. Among the myriad events set to happen this year, the interest rate hikes sanctioned by the U.S. Federal Reserve takes up the most precedence in the economic calendar.
The onset of the COVID-19 pandemic has created a ripple effect in the global sphere, causing substantial economic concerns in addition to the major threat it poses to public health. One of the notable economic impacts of the pandemic has been worldwide inflation.
Side effects of inflation
Inflation involves the rise in the costs of goods and services. While it can indicate both prosperity and troubles in the economy, it has numerous notable side effects that can impact the economy on the whole.
Inflation often leads to reduced buying power. This can cause a particular product or service to cost more than what it originally did before inflation. It can also result in the depletion of savings among businesses and the public alike. When there is a spike in prices while the average income remains the same, people will end up spending more and saving less.
Uncontrolled inflation will give rise to more inflation as cash supply will exceed demand, leading to a weakening of the currency. These factors can collectively spell doom for the economy and any opportunities for financial growth.
Three interest rate hikes
Stocks in the United States made a strong comeback following the economic tumble that it took in the wake of the pandemic in 2020. This growth was spurred by the U.S. Federal Reserve’s decision to maintain low borrowing rates whilst sanctioning an economic influx amounting to over $1 trillion in an attempt to aid in the global fiscal rebound.
However, the pandemic also brought with an off-the-charts level of inflation which, as established earlier, can potentially eat up savings, reduce purchasing power, and ruin the economy in the process if not controlled in a timely and effective manner.
In the midst of this, the Federal Reserve is all set to implement as many as three interest rate hikes this year for the first time since 2018, in a major bid to counter inflation, which has hit a record 39 year-high in the wake of the pandemic. This comes as the Consumer Price Index (CPI) reached an annual rate of 6.8% in November last year.
Priya Misra, the Global Head of Rates Strategy at TD Securities, has assuaged worries of a possible fourth interest rate hike by the Fed, contending that three rate increases are sufficient for now unless there is “more fiscal support for the consumer”.
The upcoming Fed rate hikes have without a doubt left markets on the edge. This is due to its potential negative effects on businesses, stocks, and bonds. However, it also encourages people to save more, spelling a more favorable time for bank deposits and savings account holders. Moreover, the ongoing earnings season, with the earnings report of the financial sector due to be released this week, is expected to offset worries about the impact of the upcoming Fed rate hikes as well as the looming threat of the Omicron on the world market.