How much did the Fed raise interest rates in 2022?

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Last month, the The Federal Reserve raised interest rates againthe ninth straight hike since the Fed began raising rates in March 2022. While the full effects of the latest rate hike are yet to be seen, analysts are debating whether the Fed will raise rates again at its next meeting in May.

This is the big question on the minds of many Americans: Will rising interest rates push the economy into recession? Higher interest rates make borrowing more expensive and indirectly limit consumer spending, reducing demand for goods and services and pushing the economy closer to recession. Here’s what you need to know about the rate hike campaign we’ve seen over the past year and where rates may go in the coming months.

key takeaways

• The Federal Reserve raised interest rates by 400 basis points in 2022.
• Chairman Jerome Powell has indicated the potential for a slowdown in the pace of increases, but nothing is set in stone and many analysts expect one more rate hike in 2023.
• Higher interest rates hurt some industries while others benefit from them. Investors need to know this to make smart financial moves.

Fed rate hikes for 2022

The Federal Reserve met on March 17, 2022 to discuss raising the federal funds rate. Data from the Consumer Price Index (CPI) at that time indicated that the annual inflation rate was 8.5%. This was quite a shocking number and the Federal Reserve took quick action to combat rising prices.

The Federal Open Market Committee (FOMC) has eight regularly scheduled meetings throughout the year. In seven of these eight meetings in 2022, the Fed decided to raise interest rates by 25, 50, or 75 basis points.

Near the end of 2022, Fed Chairman Jerome Powell noted that the the pace of rate increases would eventually slow. However, he did not set a timetable for when that might be, and we have seen two rate hikes since then in February and March 2023, both of 25 basis points.

What causes inflation?

A mismatch between supply and demand is the most basic explanation for what causes inflation.

For example, when supply lines were disrupted due to the COVID-19 pandemic, some industries got used to a low demand environment for their products. Oil companies, for example, did not need to transport as many products around the world since fewer people were driving their cars. When restrictions were relaxed and demand for gas increased, these companies had to raise prices because demand exceeded available supply.

Another inflationary factor as of 2022 was the circulation of stimulus money in the economy. During the pandemic, the government sent stimulus checks to encourage consumer spending and avoid an even worse recession. These controls gave consumers greater discretionary purchasing power, and increased demand for goods and services contributed to rising prices.

So sudden increases in demand or limits on supply can cause inflation. If the cost of a raw material or labor increases, it can also lead companies to increase prices, effectively passing the increased costs on to consumers.

What makes interest rates rise?

The Federal Reserve controls the federal funds rate, which indirectly influences the rate at which banks lend money from their reserves to each other. Banks must meet reserve requirements related to the amount of money they have available, so a higher federal funds rate encourages banks to save money and give less money to borrowers.

Higher federal funds rates translate into higher costs for short-term borrowing and higher returns on savings products. This is because banks want to incentivize people to deposit money with them. Credit card interest rates (because they are variable interest rates) also move in unison with these interest rate changes, thus increasing the cost of holding debt. Home starts tend to slow when interest rates are high, and people typically save more money and spend less.

Higher interest rates can drive corporations away from growth projects and may lead investors to withdraw their money from the stock market, anticipating a decline in income. What should be clear is that when the Fed raises interest rates, they hope to take money out of the economy, giving prices time to stabilize.

It is important to note that the Federal Reserve does not set mortgage rates nor do rate banks lend money to each other overnight. The Federal Reserve influences short-term and variable interest rates by setting its federal funds rate higher or lower.

Stock Market Reaction to Rate Increase

The stock market experiences different reactions to Fed meetings. For example, when the market heard that the Federal Reserve planned to slow the pace of interest rate hikes in November of last year, the S&P 500 Index rose 1%. . However, when they heard that the Federal Reserve intended to raise real interest rates, the S&P reversed course and ended down 2% for the day.

The Dow Jones swung more than 900 points after the November Fed meeting: first up nearly 500 points, only to close down more than 400 points since the start of the day. The NASDAQ Composite closed at 10,524.80 with a loss of 3.3%. Tech stocks suffered a 3% loss in stock value, including majors like Alphabet, Apple, Netflix, Amazon and Microsoft.

Rate hike announcements tend to hurt the stock market, while rate cut announcements tend to encourage investors to invest in stocks.

Policy Changes in the Future

The Federal Open Market Committee seeks a balance between maximum employment and reducing the inflation rate to 2% over time. The FOMC is firmly committed to bringing inflation down to 2% and will not deviate from its plans unless an event requires a change. Once inflation reaches the 2% mark, the Fed will consider lowering the federal funds rate.

Investors had hoped for a slowdown in the pace of the increases, but this has not been the case yet. While there may not be a need for 75 basis point hikes at the next few meetings, the Fed may well raise rates another 25 basis points next month. So far, the Fed has been aggressive with rate hikes because rates were effectively 0% early last year.

Currently, the rates are restrictive, so they should start to have a greater economic impact. As a result, the Federal Reserve must be diligent in reviewing economic data to make sure it doesn’t discourage spending too aggressively.

Also, Fed Chairman Jerome Powell has indicated in the past that the Fed wants to get to a place where real interest rates are positive. This means that interest rates have to be higher than the inflation rate.

With interest rates currently at 4.75% to 5.00% and March’s annual inflation rate at 5%, we are almost there.

The FOMC still feels and anticipates that the ongoing increases in the federal funds rate are an appropriate tactic to reduce inflation. It monitors the effects of monetary policy tightening, economic and financial developments, and the lag in which monetary policy affects economic activity and inflation.

The Fed has also reduced its holdings in Treasury securities, agency debt and agency mortgage-backed securities. These plans were laid out in the Fed’s plans to reduce the size of the Federal Reserve’s balance sheet in May 2022.

Affected Industries

With the many rate increases in the past year, there are specific industries that have felt the impact more than others. The increase has undoubtedly hurt homebuilders as mortgage rates rise for homebuyers, further slowing home demand.

Banks arguably have benefited from the rate increase. Since there are fewer applications for mortgages, banks can charge higher rates to those who still buy homes. Banks with a credit card division (and credit card companies in general) have also benefited, as the interest they charge on balances has increased, generating more revenue.

The services and hospitality sector has suffered from rate hikes. Higher interest rates with persistent inflation translate into fewer people willing to spend money on travel-related expenses. More and more consumer income is spent on survival and not on spending in discretionary categories.

Higher rates have less impact on healthcare and consumer staples. People need health care and food. regardless of whether the economy is strong or weak or interest rates are high or low.

As an investor, it’s important to understand how interest rates impact various industries so you can make smart financial decisions. Although a stock may look attractive after being beaten, there is no immediate need to invest if it is negatively affected by higher rates. Alternatively, if a stock is unaffected by rates and has fallen in price due to the general downturn in the market, it could signal a buying opportunity.

The bottom line

The Fed has raised the federal funds target rate by more than 400 basis points since March 2022. Investors had been waiting for signs that the Fed would pause further rate hikes, but this has not happened yet. The Fed is likely to raise rates until inflation falls to an even lower point. At that point, the Fed will reverse course and work to limit the economic damage from high rates while also trying to keep inflation down to 2%.

The takeaway from the latest Fed meeting is that investors will need to continue to scrutinize all the economic data. You can keep track of future Fed meetings to gauge when the Fed believes it has achieved its plan to control inflation.

The charge How much did the Fed raise interest rates in 2022? first appeared in Earring.