Fed Makes Historic Interest Rate Hike Increase

The Federal Reserve (“Fed”) has decided to implement the monetary policy stance announced by the Federal Open Market Committee on June 14 and 15, 2022:

The Board of Governors of the Federal Reserve System (“Board of Governors”) voted unanimously to raise the interest rate paid on reserve balances to 1.65 percent, effective June 16, 2022.

• In a related action, the Board of Governors voted unanimously to approve a 3/4 percentage point increase in the primary credit rate to 1.75 percent, also effective June 16, 2022.

The decision and vote follows an increase of 50 basis points in May as the Fed continues to reduce liquidity to the financial markets to help tamp down increasing inflation.

The Fed’s decision comes as inflation in the U.S. economy is at its highest annual rate in approximately 40 years—hitting 8.6% percent in May. With the Fed hitting the brakes on an overheated economy, the main question for many market watchers is if and how fast Fed Chair Jerome Powell will continue to raise rates and whether that leads to a recession. Inflation hasn’t shown any consistent signs of easing, and many analysts believe the Fed will need to be even more aggressive than was previously thought.

The Federal Open Market Committee also voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York to execute transactions in the System Open Market Account in accordance with six domestic policy directives. These include conducting overnight repurchase agreement operations with a minimum bid and offering rates and to reinvest into agency mortgage-backed securities (MBS) the amount of principal payments from the Federal Reserve's holdings of agency debt and agency MBS received in the calendar months of June and July that exceeds a cap of $17.5 billion per month. The central bank has also reiterated its monetary stances to aggressively fight mounting inflation.

In reaction to the Fed announcement, on June 16, the U.S. stock markets closed sharply higher after the Fed’s largest single-hike in the short-term lending rate since 1994. All three major stock indexes ended in the green and posted their best daily performance since June 2 of this year. The Dow Jones Industrial Average gained 1% or 303.70 points to close at 30,668.53.                                                                           

A total of 21 components of the 30-stock index ended in positive territory while nine were in the red. The blue-chip index terminated a five-day losing streak.

The tech-heavy Nasdaq Composite finished at 11,099.15, rising 2.5% or 270.81 points, due to the strong performance of large-cap technology stocks. The tech-laden index has been in bear market territory since March 7, 2022.