A Historic Half-Point Hike of the Fed Funds Rate
Key Points – A Historic Half-Point Hike of the Fed Funds Rate
- A 50 Basis Point Hike Is the Highest Fed Funds Rate Increase Since May 2000
- FOMC Chairman Jerome Powell Laments That “Inflation Is Much Too High”
- More 50 Basis Point Increases on the Horizon?
- Powell Scoffs at Idea of Future 75-Point Hike
- More Wild Swings in the Markets
- 6 Minutes to Read
Inflation Is Much Too High
The press conference that Federal Reserve Chairman Jerome Powell gave on Wednesday, May 4, felt normal for him and dozens of reporters for all of about five seconds. Yes, it was the first time that Powell spoke to the press in two-plus years due to the pandemic. However, the subject matter of the press conference, which culminated the Federal Open Market Committee meeting, was anything but normal.
Following an initial quarter-point raise of the Fed funds rate at the FOMC’s March meeting, Powell announced an even bigger hike on Wednesday with a half-point increase in hopes of slowing down rampant inflation. The half-point hike was the biggest hike from the FOMC since May 2000.
“Inflation is much too high,” Powell said during his opening statement. “We understand the hardship it is causing and are moving expeditiously to bring it back down. We have the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient. It’s essential that we bring inflation down to have a sustained period of strong labor market conditions that benefit all.”
How to Fight Inflation
Well, we can all agree with Powell about one thing—inflation is much too high. Dean Barber and Bud Kasper have discussed at length on America’s Wealth Management Show about how we’ve reached these historic inflationary levels and different financial planning strategies to fight inflation.
While Dean and Bud wish that Powell and the FOMC had acted quicker to get ahead of this inflation, the whole Barber Financial Group team remains committed to helping clients and prospective clients with finding clarity and confidence in their respective financial plans. We’ve even put a few detailed lists on how to fight inflation below that you’ll want to keep handy.
What All Has Changed Since the March FOMC Meeting?
At the conclusion of the March FOMC meeting, one of the primary Fed funds rate projections for the remainder of 2022 called for six additional quarter-point increases. As we can see from Wednesday’s half-point hike, it didn’t take long for that plan to be scrapped.
Powell shared that the FOMC’s long-term goal is for inflation to get back to 2%. He also offered a few reasons for why they’ve been getting further away from that goal.
“Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. Disruptions to supply have been larger and longer lasting than anticipated, and price pressures have spread to a broader range of goods and services,” Powell said. “The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is creating additional upward pressure on inflation. And COVID-related lockdowns in China are likely to further exacerbate supply chain disruptions as well.”
That is a lot to unpack in one quote, but it is vitally important to unpack all of it amid this economic uncertainty. That is exactly what Shane Barber did in his most recent article, Geopolitical Uncertainty Creates Chaos … And Opportunities. There are a lot of moving parts involved here. It makes it that much more important to seek the advice of a financial planner who is in tune with everything that is going on.
More 50-Point Increases Already on the Table
So, where do we go from here? Now that the plan of six quarter-point increases was quickly dashed, Powell said on Wednesday that additional 50-point hikes would be considered for the next couple of FOMC meetings. Additional 50-point hikes haven’t seemed out of the question with how things have been going. What was questioned, though, by CNBC’s Steve Liesman was if we could expect a 75-point or full percentage increase soon. Here’s what Powell had to say.
“So (a) 75 basis point increase is not something the committee is actively considering. What we are doing is we raised 50 basis points today,” Powell said. “And we said that, again, assuming that economic and financial conditions evolve in ways that are consistent with our expectations, there’s a broad sense on the committee that additional 50 basis points should be on the table for the next couple of meetings. So, we’re going to make those decisions at the meetings, of course, and we’ll be paying close attention to the incoming data and the evolving outlook, as well as to financial conditions.”
A Wednesday Market Rally Followed by Thursday Tumbles
The markets seemed to react positively to Powell’s projection, but only for a short while. On Wednesday, the Dow Jones Industrial Average jumped 2.81%, the S&P 500 surged 2.99%, and the Nasdaq Composite went up 3.19%. Those gains for the DJIA and S&P 500 were the largest increases from each index since 2020.
Fast forward to Thursday. By noon eastern time, Wednesday’s gains were gone. The DJIA dropped 3.9%, the S&P 500 dipped 4.3%, and the Nasdaq Composite plunged 5.9%.
“If you go up 3% and then you give up half a percent the next day, that’s pretty normal stuff,” Randy Frederick, who is the managing director of trading and derivatives at the Schwab Center for Financial Research managing director of trading and derivatives at the Schwab Center for Financial Research, told CNBC. “…But having the kind of day we had yesterday (Wednesday) and then seeing it 100% reversed within half a day is just truly extraordinary.”
Dean has said the words “market volatility” more times than he can count in 2022. Well, the market swings we saw from Wednesday to Thursday highlight that in a nutshell.
An Update on the Fed’s Balance Sheet
Along with announcing the 50-point Fed funds rate increase and the possibility of more to come, Powell provided an update on the Fed’s plan to reduce its balance sheet. According to the FOMC’s press release, the FOMC plans to “reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA). Beginning on June 1, principal payments from securities held in the SOMA will be reinvested to the extent that they exceed monthly caps.”
In the short-term, the cap will be $30 billion per month for three months on treasury securities. Then, it will increase to $60 billion per month. The cap will be at $17.5 billion per month for three months for agency mortgage-backed securities. And just like with the cap on treasury securities, the cap on the mortgage-backed securities will double (to $35 billion a month) after three months.
“At the current level of mortgage rates, the actual pace of agency MBS runoff would likely be less than this monthly cap amount,” Powell said. “Our balance sheet decisions are guided by our maximum employment and price stability goals. In that regard, we will be prepared to adjust any of the details of our approach in light of economic and financial developments.”
Remembering the Fed’s Monetary Policies
After the FOMC’s March meeting, we were fortunate to catch up with LSA Portfolio Analytics President Brad Kasper to discuss the Fed’s monetary policies. Brad reminded us that they have three core policies.
- Protecting the value of the dollar.
- Keeping employment in check.
- Keeping inflation in check.
Well, we’ve already explained how there is plenty of work to do on No. 3. Let’s keep in mind, though, that keeping inflation in check isn’t 100% in the Fed’s control. Powell didn’t touch on it in his presser, but Dean and Bud believe that a good portion of the blame for these current inflationary pressures needs to be placed on the government for the massive amount of stimulus ($5 trillion to be exact) that was pumped into the system.
Powell did highlight some progress that has been made on keeping employment in check, though. In the first quarter of 2022, employment increased by nearly 1.7 million jobs. The U.S. recorded its lowest unemployment rate in nearly 50 years in March, coming in at 3.6%.
“Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics,” Powell said. “Labor demand is very strong, and while labor force participation has increased somewhat, labor supply remains subdued. Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years.”
We’re Here to Answer Any Questions About Your Financial Planning Needs
While the improvements in the labor market are encouraging, that’s just one piece of the puzzle that we’re concerned about. At Barber Financial Group, we’re committed to helping people get to AND through retirement. Inflation is arguably hitting retirees harder than anyone right now because they’re depending on their 401(k), IRAs, and other investments to account for their income.
It’s perfectly understandable to have questions about how these rising interest rates can impact you. In fact, we’d honestly be a little concerned if you didn’t have questions. There is a lot to be keeping track of right now. Whether it’s about inflation, rising interest rates, what’s going on in the markets, or anything in between, contact your advisor with your questions today.
If you aren’t a Barber Financial Group client, we encourage you to reach out to us with questions as well. You can schedule a 20-minute ask anything session or a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ professionals. We are looking forward to helping you find the clarity and confidence that’s crucial to everyone in retirement.
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.