As murmurs of inflation have plagued the stock market in recent months, the Federal Reserve announced that it will be raising interest rates in order to combat fears. These rate hikes will symbolize the end of pandemic-centric policies that have played a big role in recent stock market gains.
With inflation at a 40-year high, the Fed feels that action must be taken. With bipartisan support that is hard to come by these days, President Biden stated that it was “appropriate” for Fed Chair Jerome Powell to make these changes. The goal of the interest rate increase will be to temper inflation without jeopardizing the labor market growth that the economy has seen.
“The best thing we can do to support continued labor market gains is to promote a long expansion, and that will require price stability,” said Powell. Whether or not the interest rate increase will accomplish the Fed’s goals remains to be seen, and many economists are split on the issue. Some claim the Fed is acting too late and inflation is an inevitability due to its inaction earlier in the pandemic. Others say the move is too aggressive and this rate hike could put the brakes on hiring, and inflation issues are actually a result of a broken supply chain that the Fed cannot fix.
Ultimately, Powell believes “there is quite a bit of room to raise interest rates without threatening the labor market.” While some say this is unrealistic, there is a consensus that believes changes had to be made. With consumer prices rising at 7%, contrasted with the Fed’s inflation goal of 2%, there was an unhealthy amount of uncertainty that inaction would likely exacerbate. Low interest rates have driven the stock market to all-time highs, and while the recent Fed news caused a 10% dip in the S&P 500, this may just represent a necessary and temporary setback. How things will play out has economists split, but few deny the Fed had to take some action. Whether it gives the economy the stability Powell and the Fed desire, however, remains to be seen.