Key points to remember
- Jerome, Chairman of the Federal Reserve
- Powell made it clear that the central bank will continue to raise interest rates until inflation is brought under control.
- Economists forecast another 0.75% rate hike later this month, see the economic calendar below for the timing.
- High interest rates and volatility don’t mean your investments are doomed, there are markets like consumer staples that can help hedge against losses.
We’ve all seen the headlines: Interest rates rise as the fight against inflation continues. It is now evident that interest rates will most likely continue in this direction for the foreseeable future, at least until inflation is brought under control. So all eyes are on the Fed as pundits speculate on when the next rate hike will be announced.
Rising interest rates can affect us just as much as inflation. When interest rates rise, the cost of borrowing also rises. That means we’ll all spend more on variable-rate loans and be less likely to borrow new money (read: take on expensive new debt). These rate hikes also have an impact on the overall economy as access to money becomes more expensive. That’s why it’s important to follow the Fed’s interest rate announcements.
Let’s consider the possible effects of the next interest rate hike and when the Fed might get there, based on what we know so far.
The Federal Reserve, or “the Fed,” currently controls the money supply in circulation in our economy. One of the main objectives of the Fed is to control inflation. The Federal Open Markets Committee (FOMC) sets the federal funds rate at its meetings to influence the economy, and they will raise rates when it is time to slow economic activity in order to fight inflation.
When you hear Fed media announcements, they’re probably coming from Federal Reserve Chairman Jerome Powell or someone else on the committee. Powell had his last publicly scheduled appearance on September 8, ahead of the next central bank meeting on September 20-21. This appearance made it clear that the central bank’s current objective is to reduce inflation, although we don’t know for sure what will come out of the meeting, as Powell and his team need to assess the most recent data before take a decision.
So when exactly does the Fed meet?
Economic calendar: Federal Reserve meeting schedule
The good news is that there is a rough timeline for the Federal Reserve meeting so that we can hopefully anticipate a possible interest rate hike and plan accordingly. Economists often pay attention to announcements and interviews involving FOMC members in the weeks leading up to their meetings, hoping to predict what will happen next. Sometimes rate hikes are predictable, while other times there is no consensus on what kind of announcement will come out of the meeting.
Here is the Federal Reserve meeting schedule for the remainder of 2022:
- September 20-21.
- November 1-2.
- December 13-14.
Many economists, including those at the Bank of America, believe a third straight rate hike of 0.75% is coming this month as the FOMC looks to curb inflation. The Fed will review all relevant data at its meeting later this month.
What will the Fed consider?
It is important to know what the Fed considers when it meets to discuss interest rates and strategy. As a reminder, the Fed initially did not react with new policies when inflation started to rise in the spring of 2021, as it attributed the rise in prices to pandemic-related factors. As they considered inflation to be “transitional”, they did not react with any rate hikes until March 2022. Some experts feared that this late response would have consequences.
Fed to review consumer price index (CPI), labor reports, producer price index, consumer sentiment index, retail sales data and other data published this week on the economic calendar to assess the impact of the last rate hike in July and make a final decision on the expected rate hike in September. Consumer spending and labor reports are key considerations as the central bank does not want to drag the economy into a recession by increasing unemployment as inflation soars.
Their objective is to reduce the impact of rate increases on social relations. With so many people working and earning, another rate hike is unlikely to push us into a recession. The Fed will therefore be more confident about raising rates since the labor market is solid, posting robust hiring data.
The labor market added 315,000 new jobs in August. This number is not ridiculous because it shows that companies are still hiring, which means they are still making money despite the fact that the price of everything is going up. People who are employed continue to spend money faster than people who are unemployed.
Consumer spending also remained strong, with economists expecting the CPI to rise 0.2% at the September announcement.
Understanding the Federal Funds Target Rate
The federal funds rate is the interest rate at which banks and other institutions lend money to each other. The federal funds rate is a tool for controlling the supply of funds and, by extension, reducing inflation. When the rate is increased, it is more expensive for everyone to borrow money, which reduces the money supply and increases short-term interest rates.
The Fed has already raised its benchmark interest rates four times this year. The Fed sets a target range for the federal funds rate with an upper and lower limit. The target federal funds rate is now set in a range between 2.25% and 2.50%. This range was set at the Fed’s July meeting when the rate rose 0.75%.
A rise in the federal funds rate makes it more expensive to borrow money, causing the economy to decline. Since the FFR is the average rate that banks pay when they borrow money from each other overnight, this has an impact on the rates of everything, especially the prime rate that banks charge at their best customers. The Fed wants to keep the FFR within the specified target range to control economic fluctuations.
Companies that benefit from higher interest rates
Are higher interest rates bad news for everyone? Not necessarily. Many businesses suffer from higher interest rates because the cost of borrowing and doing business increases. Other companies make more money from higher interest rates because their business models are tied to these numbers.
It’s no secret that any business in the financial sector will benefit from interest rate hikes. Banks make more money from higher interest rates because they can pay customers more, which will attract new customers and more activity in savings accounts. Credit card and financial services companies will also generate more revenue by charging higher rates.
Insurance companies will benefit from higher rates because they invest part of the premiums in the bond market, which is higher when rates rise.
Consumer staples also do well when interest rates rise, as people are more concerned with saving money and this sector is considered recession proof. Consumers spend less on big ticket items when prices rise because they are more budget conscious. However, they cannot avoid spending money on food and other necessities.
If you’re concerned about how to invest your money in times of high inflation, you might want to take a close look Q.ai inflation kit and protect your investments. Just because inflation is skyrocketing doesn’t mean your investments have to suffer. Even better, you can enable Wallet Protection at all times to protect your gains and reduce your losses, regardless of what aspects of the market you are investing in.
While we can all try to predict what the Fed will announce regarding interest rates, we really don’t know what will happen until the announcement is official. The reality of our current situation is that interest rates will likely continue to rise. This means that you may want to think twice before making major purchases, as they will cost you more.
The Fed stressed that the central bank will continue to hike rates until inflation is brought under control. The timing of this target is unknown as we have to wait to see how the economy reacts to each additional rate hike. We know when the next FOMC meetings will take place in order to be ready for possible rate hikes.
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