The upcoming Federal Open Market Committee (FOMC) meeting this week may well prove to be the Federal Reserve’s last effort at easing inflation this year. The central bank is expected to approve yet another rate hike in 2022 — likely a massive 75 basis-point increase. The Fed has left a virtual earthquake in the wake of its previous rate hikes. So, what should you expect this time around?
Well, if history is any indication, expect the stock market to react in kind. Following the Fed’s September hike, the stock market dropped 1.7% as the federal funds rate hit the 3% threshold. Heading into the November meeting, the Fed is eying a federal funds rate of 4%, the highest level since 2008.
When the Fed raises rates, it’s essentially a tax on the entire financial system. Borrowing costs rise for businesses and individuals alike, weakening corporate profits and restricting the flow of cash in and out of the economy.
Most economists maintain that the full impact of interest rate changes can take up to three years to completely manifest. However, the effects of elevated borrowing costs have hardly gone unnoticed. For instance, 30-year fixed mortgage rates are hovering over 7%. Not only is that more than double the 3% rate enjoyed at the start of the year, it’s the highest level in 20 years.
That said, the Fed has seemingly been successful in its efforts to curb inflation’s hazardous rise. As per the September Consumer Price Index (CPI) report, annual price growth fell to 8.2%, the slowest level since February. While this is still a far cry from the Fed’s long-stated 2% target, it’s at least an indication that this year’s hikes haven’t been in vain.
Why This May Be the Last Major FOMC Meeting of the Year
While the 75 basis-point hike is all but a certainty Wednesday, what remains unclear is whether this may prove to be the final interest rate increase of 2022 — and what that means for financial markets going forward.
At Wednesday’s FOMC meeting, Fed Chairman Jerome Powell will likely offer a timeline for future rate hikes. He will also likely offer what the central bank will be looking for from price indicators as evidence that it’s time for the Fed slow its hawkish agenda. As of right now, most analysts and economists expect an additional December hike. However, it wouldn’t be surprising to see the Fed opt for a lighter 50 or even 25 basis-point hike.
San Francisco Fed President Mary Daly recently commented on the Fed’s path forward as it pertains to tempering off such large rate hikes.
“We might find ourselves, and the markets have certainly priced this in, with another 75-basis-point increase […] But I would really recommend people don’t take that away and think, well it’s 75 forever.”
Going forward, all eyes will be on the Fed. The central bank has long been at the forefront of the prophesied “soft landing” — a situation where inflation is brought down to a manageable level without sending the country into a recessionary spiral. And in that regard, there are promising signs afoot. These include October’s strong job growth and surprising third-quarter gross domestic product (GDP) turnaround.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.