After inflation ran wild, the Federal Reserve faced a task where it feels like there is no way to win. Going without a rate increase would allow for inflation to reach all-time highs and create an economic catastrophe that would be hard to contain. Raising rates is the solution, but by too much would cause a slowdown that could progress into a recession. The Fed needs to find the middle ground, and no one knows exactly where that is. So far, the Fed has made three interest rate increases, the first two being half a percent and the third being three-quarters of a percentage point, which are some of the largest rate increases we’ve seen in history. Even with this, inflation reached new highs in June, which has officials very confused on what to do next.
Due to this news, Fed officials have started to discuss a possible one percent interest rate increase, which would be a market-changing decision. However, many details point against that being the right decision. Economic data shows that the Fed’s previous rate increases might be starting to fix the problem as there has been some positive statistics too. Retail sales in the US rose by 1 percent in June, showing strength from consumers, and a survey from the University of Michigan found that consumers’ long-term inflation expectations are low. Officials also argued that a 1 percent rate hike could trigger the scenario we proposed, where the economy might have to undergo a recession as it can’t adjust quickly enough. Investors and economists now expect a three-quarter percentage point hike, and this should allow the Fed to find the correct spot a lot easier.
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.