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US Fed Rate Hikes are a World Concern

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US Fed Rate Hikes are a World Concern

If you’re looking for a surefire way to begin the day on a sour note, take a look at your 401K. The stock market has taken an absolute beating as of late. The S&P is down more than 20% since early January while the Nasdaq has shed an eyepopping one-third of its value. Nearly every index is down big and rising prices are putting real pressure on corporate earnings. Amidst all this, however, the biggest issue for everyday folks is inflation. 

Inflation is a thorn in the side of policymakers. When prices rise people feel it. Once that pain sets in, they look for answers. Former President Gerald Ford understood this well, declaring inflation as America’s Public Enemy #1 back in 1974. The bright side is there are some tools in a policymaker’s tool belt to deal with stubborn inflationary cycles. 

First, if the economy has simply overheated, central banks can raise interest rates in the hopes of ensuring more price stability. As the cost of borrowing increases, this tends to reduce demand, and over time can tame rising prices. The US Federal Reserve did just that on June 16th, hiking the benchmark interest rate by 0.75%. In a bubble, this is a US policy measure designed to bring down inflation. But as a global leader in an intertwined, international environment, the US does not exist in a bubble. What happens in the States has major ripple effects globally. 

When the Fed made its move on the 16th you can be sure central bankers and markets worldwide were tuned in. In the days following the hike, the Bank of England also moved to raise interest rates. The Swiss National Bank was next, raising rates for the first time in nearly 15 years. Australian policymakers are eyeing the biggest move their reserve bank has ever made, and the European Central Bank announced an imminent rate hike in July. 

Increases at a global scale combined with supply chain bottlenecks (the war in Ukraine and the Chinese COVID-related shutdowns) will likely handicap global economic growth. Coupled with these hikes is the declining value of currencies. The US dollar has been gaining value fast against currencies such as the euro. A strong dollar makes imports cheaper for US consumers and hurts US exports as their products are in turn more expensive for foreign buyers. 

So are there any winners in this complex environment? Well, if you have money in a savings account, that’s not a bad place to be. When the pandemic began, the Fed dropped interest rates and the average rate for a savings account was in the 0.06% range. With the Fed hike, don’t be surprised to see this tick up to 1% or even more. If you have a considerable about of cash deposited, your bank will likely want to see you stick around so you might even be able to negotiate a higher rate. 

Another area is CDs or I Bonds which are both offering higher returns than before. The long-term hope is inflation rates in the 2% range while keeping unemployment below 5%. This would be considered a soft-landing. Right now, however, that is far from certain.