The Current State of Inflation and the Fed’s Interest Rate Hikes

In late August, the Federal Reserve Chair, Jerome Powell, made a speech at the annual policy forum in Jackson Hole, Wyoming that scared investors into a major stock sell-off. 

Why? The Fed warned that some pain is necessary to fight inflation and avoid more pain in the future. But as fear over forthcoming pain mounts, investors are losing faith in the trajectory of the market and stock prices are falling. 

The down market is now making companies who planned on going public this year think twice. But that doesn’t mean there isn’t an opportunity to garner investment. Companies can raise capital in private markets through accredited investors.  

An Accredited Investor is a term the SEC uses to distinguish investors who are qualified to make riskier investments, such as in hedge funds or start-ups. The caveat is that investors must meet certain criteria and attain an accredited investor certificate before they can make such investments. It’s important to learn how to verify accredited investors if you’re interested in tapping private funding or in becoming an accredited investor yourself. 

So where is the market headed next? What is the current state of inflation? And how will previous and future interest rate hikes impact the economy as a whole?

Interest Rates

At the last three Federal Reserve meetings, the committee has raised interest rates by 75 basis points — the largest increase in rates since the early 90s. According to the recent announcement from the chairman, more rates are likely ahead.

On that day in Jackson, Mr. Powell said the decision to raise interest rates further at the Fed’s next meeting in September will depend on the outlook at that point in time. If things keep going the way they’ve been going, and even if the economy shows signs of stability, it’s likely going to happen. Powell warned, “Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”

The goal is to continue to raise rights until price stability is restored.

Inflation

Despite aggressive interest rate hikes, inflation has carried on. High inflation continues to increase the cost of living for many Americans. The inflation rate reached a high of 9.1% year-over-year in June. Although it did dip to 8.5% in July, inflation is still nowhere near the 2% target rate. And that target rate, or price stability, seems to be the chief goal of the Fed at present.

The Outlook

To reach this goal, Powell said we can expect a below-trend growth for a while. Verbatim stated, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

The short-term outlook isn’t great, but as in all recessionary environments, some businesses will thrive. It’s up to individual investors to determine which businesses will be resilient in the face of future economic conditions and market volatility.