The U.S. stock market responded with a rally on Wednesday after Federal Reserve Chairman Jerome Powell announced plans by the Central Bank to raise interest rates by .5%. The announcement followed a two-day meeting by the Federal Open Market Committee (FOMC) that ended Wednesday. All S&P 500 sectors ended the day in the positive, and the Dow was up 900 points at the end of trading.
Powell also indicated that subsequent .5% increases would likely be considered in upcoming meetings, held every six weeks, but poured cold water on concerns of a larger .75% incremental jump. This news was well-received by investors and was in line with what Powell had indicated last month was likely to happen.
In the past, the Federal Reserve has most often raised interest rates in quarter-point increments. A .5% increase is rare – it last happened in 2000 – but it is a necessary part of Powell’s overall plan to tame the four-decade-high inflation rate and shrink the U.S. $9 trillion debt.
As inflation rises to unprecedented heights, raising the interest rate will make borrowing money more expensive and thus help to cool spending. With consumerism growing, businesses cannot keep up as the supply chain becomes increasingly fragile due to a large portion of China in lockdown, the war in Ukraine, and a general shortage of supplies.
According to NPR, the Commerce Department released data last week that showed that prices in the U.S. had surged 6.6% within the past year. Such an increase is more than three times the Fed’s target rate for inflation, the sharpest increase in 40 years.
Powell has previously voiced that he believes the Fed can achieve a “soft landing” for the economy. The goal of the Central Bank is to raise rates enough to curb inflation without plunging the U.S. into a recession. According to Bloomberg, the FOMC feels that the end target interest rate for achieving that delicate balance is around 2.5%.
According to NPR, Powell stated that his suggestion to the Central Bank was to raise interest rates as quickly as feasible and then pause as necessary after inflation has been tamed.
“It is appropriate in my view to be moving a little more quickly,” Powell told an International Monetary Fund forum last month. “I also think there’s something in the idea of front-end loading whatever accommodation one thinks is appropriate.”
However, economists at Deutsche Bank AG previously stated that the Fed should double down and be more aggressive with rates in order to curb the current inflation situation and avoid a recession. In their view, the Fed would need to raise interest rates to 5% or 6%.
Some other financial indicators may also help the U.S. economy find that “soft landing” for which Powell is aiming. Capacity utilization, the relationship between output and equipment, is rising, and payrolls are increasing, bringing workers back to the job market.