The U.S. is currently suffering from an inflation surge. To help lower prices, the Federal Reserve is thinking about raising interest rates.
The president of the St. Louis Federal Reserve Bank, James Bullard, has said that he has become “dramatically” more hawkish. He now supports raising interest rates by a full percentage point by July 1.
There are only three meetings before that July 1 deadline. If the Federal Reserve decides to raise interest rates by that amount, then they’ll have to raise rates by half a point during a single meeting. Typically, interest rates are raised by a quarter of a percentage point per meeting. The Federal Reserve hasn’t done a half-point rate increase since 2000.
Raising Interest Rates This Aggressively Is a Bold Move
Unfortunately, it would seem that drastic situations call for drastic solutions. Peter Boockvar, chief investment officer at Bleakley Advisory Group, said that it would be “weird” to have such high inflation rates without having a high rate increase to combat it. “If you want to get back control of your credibility and reputation, you should be more inclined to raise 50 than 25,” he added.
Just a few months before Bullard’s comments, people were debating on if the Reserve would raise rates two or three times this year. Now, some banks are calling for multiple rate hikes this year. For example, Bank of America is suggesting that the Federal Reserve raise interest rates seven times this year. This would amount to a quarter-point raise at each official meeting. However, officials are saying that they need to take more aggressive steps to stop this surge of inflation.
Federal Reserve Interest Hike Impacts Stock Market
Investors are now banking on a 99% chance that the Federal Reserve will raise interest rates by 50 basis points (or half of a full percentage point) next month. That percentage is up extremely from 24%. “The risks are growing for a 50-basis point rate hike,” said Alexander Lin, an economist at Bank of America. In fact, many are now thinking that there could even be a three-quarter percentage point hike in March.
These numbers are not sitting well with the stock market. On Thursday alone, the Dow fell by 1.2%, or 425 points. The decrease happened after Bullard’s comments about raising interest rates. In fact, we can tell how serious this inflation issue is just by the fact that investors, Wall Street banks, and Federal Reserve officials are even considering such an interest hike. CNN reports that a half-point increase is aggressive, let alone a three-quarter increase.
Interest rates have been rock-bottom for the majority of the pandemic. If the Federal Reserve decides to undertake such an aggressive rate hike, it could startle investors. This is a delicate situation because inflation is out of control but “the Fed doesn’t want to surprise markets.”