U.S equity indices traded lower yesterday, as the Meeting Minutes publication from the U.S Federal Reserve created momentary shudders of nervousness within the broad financial markets. The Federal Reserve has made it clear that a further rate hike of 0.50% is being considered, as the institution tries to combat inflation, which many analysts fear has escaped the grasp of the U.S central bank.
The U.S Fed raised its key interest rate in March by 0.25% to a full federal funds rate of 0.50%. However, via the publishing of the Meeting Minutes yesterday, it is clear some of the central bankers sitting on the Fed committee were hoping for a more aggressive hike and were not pleased when the U.S central bank only raised rates by a quarter of a point.
Broadcasting Sentiment to Prepare Investors
The U.S Federal Reserve tries to be transparent with the financial markets as much as possible regarding their interest rate policy. The U.S government has a keen desire to make sure equity indices and the bonds market have insights regarding upcoming maneuvers from the Federal Reserve. A healthy U.S stock market keeps the U.S economy booming in several respects, and the ‘golden goose’ needs to be kept comfortable to produce gains and keep corporate America healthy.
The fact that the U.S central bank is actively engaging in talk regarding another move higher is no surprise. The Fed has made it known they could hike as many as five times during this calendar year to try and fight rising inflation. Rising consumer prices certainly caught the central bank by surprise much of last year. The next Federal Reserve meeting and announcement will be on the 4th of May 2022.
U.S Fed Considering a 0.50% Interest Rate Hike
The rhetoric coming from the Meeting Minutes yesterday seems a preparation psychologically for investment institutions to understand a larger interest rate hike in May is likely. It seems like a solid bet the Fed did not want to scare investors in March with an aggressive larger hike, but now that the groundwork has been set, a hike of 0.50% from the upcoming Fed meeting is on the cards. This would put the key fund rate at 1.00%, this is still historically low and the U.S central bank will have additional room to raise rates in the coming months if needed.
Markets Already Primed for Higher Rates
The fact that the U.S Fed has made its interest rate thinking public for all to hear, has largely been for the benefit of Wall Street and investment institutions like corporate banks. Traders should have no doubts that investment houses have reacted to what they perceive will happen from the U.S central bank already. While the recent selloff within the S&P 500 may in fact look bad to many short-term investors, the notion that the Fed will raise rates and let investment houses ‘know’ this is about to happen is actually meant to calms the market over the longer term.