The Federal Reserve raised the interest rates this past Wednesday(12/14/22) by 50 basis points in an effort to bring down inflation. Since March, the Federal Open Market Committee (FOMC) has been trying to lower the inflation to around 2%. However, since the inflation has been relatively constant in recent months, there was a smaller rate hike in December. Currently, the main objective is trying to slow down inflation without tipping our economy into recession. While this might seem like a good approach, higher interest rates slow down economic activity by increasing borrowing costs for companies and consumers.
Investors are worried and concerned throughout this year. While some think that the Fed cannot manage inflation without triggering a recession, others are positive that the approach will yield positive results in the long run. Increasing rates have negatively impacted the housing and stock markets. In 2022, the S&P is down 16.2%, while existing home sales are reduced to 24%. Although the Fed has done a good job raising the interest rates from 0% to 3.75%, they are expected to go up to 4.25% on by the end of 2022.
The labor market in the U.S. was tight this year, making it harder to fight against inflation. As the government created more employment opportunities, wages increased by 5.1% in November. Higher wages increase labor costs, and all the subsequent costs are passed on to consumers by raising the prices of goods and services. It is important to understand that as inflation slows down, there will be small rate hikes next year to the tune of 25 bps to boost the economy.