In its bid to combat surging inflation, the Feds have hiked interest rates by a half percentage point, the highest in over two decades.
Yesterday, the US Federal Reserve finally confirmed the much-anticipated hike of its benchmark interest rate by half a percentage point. The move is its most aggressive effort yet to tackle inflation in America which is currently at a 40-year high.
Usually, the federal funds rate determines how much banks charge each other for short-term lending. However, it is also linked to several adjustable-rate consumer debt products. With inflation growing, the feds have increasingly become hawkish in their stance to prevent a predicted recession from occurring.
Additionally, the central bank announced that it would begin decreasing asset holdings on its $9 trillion balance sheet. During the pandemic, the Fed bought bonds to keep interest rates low and money moving through the economy. However, the current price spike has forced a drastic shift in monetary policy.
Consequently, Wednesday’s interest hike sees the short term rates move into the 0.7% to 1% range. Market analysts predict that the rate will reach the 2.7% -3% zone by the end of the year, with further hikes expected.
Despite anticipating the interest rate hike, both the equities and crypto markets have continued to experience increased volatility. The situation has led to investors paying more interest in the feds’ action as they work towards ensuring the markets function well.
IMF Warns Inflation May Turn Out Faster Than Expected
The International Monetary Fund (IMF), through its deputy managing director, Kenji Okamura, has warned that inflation might turn out faster than anticipated. In a recent interview, Okamura suggested that major central banks underestimate the risk of inflation rising beyond their comfort zones.
Furthermore, he warned that monetary institutions must monitor the inflation situation closely and adjust policies immediately. His sentiments echo the IMF’s stance that indiscriminate interest rate hikes could be detrimental to emerging economies globally.
The IMF has called on developing countries to institute changes to their monetary policies to reduce the impact of these hikes. The international body has called for a devaluation of the local currencies and a scaling back of fiscal support to reduce debt and inflation levels.
Finally, Okamura reiterated the importance of providing funds to tackle pandemics and strengthen health systems globally. He said,
“The international community should recognize that its pandemic financing addresses a systemic risk to the global economy, not just the development need of a particular country. Accordingly, it should allocate additional funding to fight pandemics and strengthen health systems both domestically and overseas. This will require about $15 billion in grants this year and $10 billion annually after that.”
Stocks and Crypto Maintain Close Correlation
Following the confirmation of the Fed’s interest rate hike, the crypto and stock markets rallied, further pointing to their growing correlation. After the announcement, all 11 S&P 500 sectors were positive. The Energy and Finance sectors led the rally, with the tech industry also climbing.
A similar surge was seen in crypto, with Bitcoin gaining over 3% in the last 24 hours, according to Coinmarketcap. The positive reaction cut across the entire crypto market, with several other digital assets post gains.
Source: Yahoo Finance
Consequently, the price surge further affirms the increasing correlations between crypto and the stock market. As seen above, both financial assets have fallen and risen in tandem in the face of the current global macro winds. However, analysts believe that Bitcoin now behaves like a risk-off asset and will outperform stocks in the future.
Do you think the Financial market will rally as the Feds continue to hike interest rates? Let us know your thoughts in the comments below.
Chris is a crypto enthusiast and a firm believer in the blockchain’s ability to create a new financial paradigm. Through writing, Chris hopes to expose the intricacies of this disruptive technology and how it is beneficial to Africans and developing countries. He aims to give readers a rational and unbiased outlook of the industry by equipping them with the necessary information to make enlightened investment decisions.
