On 21 September 2022, the US Federal Reserve hiked the key rate by 0.75%. Following the rate hike announcement, the US as well as Indian markets declined. So, let’s take a look at what the US Fed said and what was the impact of the latest rate hike on the stock markets globally.
Fed hikes rate aggressively
The US central bank has announced the fifth consecutive rate hike this year. After the recent hike, the key rate currently stands at 3.25%. Also, the Fed officials have indicated that they can raise the key rate as high as 4.4% in 2022 and 4.6% in 2023.
Battling stubborn inflation
So, why is the US central bank aggressively increasing rates?
In August 2022, retail inflation in the US rose by 8.3% on a year-on-year basis. This is way above the Federal Reserve’s inflation goal of 2%.
In a bid to control inflation, the US Fed is hiking interest rates. With the Fed increasing the key rate, the US banks would need to charge higher interest rates on the loans they dole out. This would make borrowing costlier, and could lead to a fall in consumer spending. In turn, this could lead to moderation of demand for goods and services and thereby may result in a fall in inflation or price rise.
Markets fall globally
While this rate hike was in line with the street expectations, it seems like the Fed’s aggressive commentary impacted the markets. This is because higher interest rates and the possibility of lower spending are not good for corporate earnings.
After the rate hike announcement, the US markets closed in the red. Also, the Indian markets witnessed weakness.