Interest rates have an interesting link with the economy and the stock market. Interest rates have a major impact on economic activity and growth as it determines company decisions like borrowing and what our banks will do, and the stock market often rises when interest rates are low. We got to see this firsthand in the last year as the Federal Reserve lowered interest rates to near zero after the COVID-19 recession to boost the economy, and the financial steering has worked so far as the stock market has roared back and companies have returned back to their pre-COVID levels. However, it now looks like the Fed is ready to steer the ship back to what it was a couple of years ago when times were normal.
During the Fed announcement on Wednesday, chair Jerome Powell confirmed the tapering process we discussed a couple of weeks ago, but the Fed also readjusted their projections for when rates would increase. Instead of it being the early quarters of 2023, they now project it to happen by the end of 2022, something officials didn’t expect in July. The benchmarks for rates to rise is for inflation to reach the 2 percent level and the labor market returning to maximum employment levels, which makes sense because that signals a normal economy. Fed officials agree to ending the bond-buying program by tapering before they raise the rates, but the rate at which to do so is still in question. So far, the Fed has had multiple economic wrenches thrown at them, the latest being the Delta variant, so it’s reasonable to expect some changes and uncertainty regarding economic policy in the coming months. The indices loved the announcement, and it was an overall good day as they had something else to look at other than the Evergrande scandal. What do you think about the Fed announcement?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.