Invest: Tame inflation? It won’t be easy

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The Federal Reserve on Wednesday implemented its largest interest rate hike since 1994, taking the threat of inflation seriously by intensifying its campaign against surging prices. Another 75 basis point hike – or a 50 bps move – is also in the cards for the meeting in July, according to Fed Chair Jerome Powell, who is just beginning to show his aggressive side. Stocks initially climbed into the close in somewhat of a relief rally, but a bloodbath rocked Wall Street in the following session, with the Dow Jones tumbling below the key 30,000 level for the first time since January 2021.

“We don’t seek to put people out of work,” Powell said at a press conference, adding that the central bank is not trying to induce a recession. “Of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability. It’s not going to be easy, and it may well depend, of course, on events that are not under our control.”

How will it affect the average American? Despite the largest rate hike in three decades, it will take some time for the higher borrowing costs to cool demand and make their way into the economy. Mortgage rates will continue to go up, as well as car loans and credit cards, making it much more expensive to borrow cash. The hikes also won’t impact the supply side, which the Fed largely attributes to soaring gas and food costs. In terms of the stock market and retirement funds, things will largely depend on whether investors believe the Fed will be successful in pulling off a “soft landing,” by stabilizing inflation without denting economic growth.

“It’s about time we exit this artificial world of predictable massive liquidity injections where everybody gets used to zero interest rates, where we do silly things whether it’s investing in parts of the market we shouldn’t be investing in or investing in the economy in ways that don’t make sense,” said Mohamed El-Erian, Chief Economic Advisor at Allianz. The Fed isn’t the only one existing the monetary regime, with the Bank of England raising rates for the fifth time in a row on Thursday and the Swiss National Bank hiking its benchmark for the first time since 2007.