On Wednesday, US stock indexes closed higher than the previous day in the wake of published minutes from the recent Federal Reserve meeting. This report offers clues for the investors regarding the approach that the US central bank will use to fight inflation. It also informs them of the interest rate that the bank will apply.
Fear among investors is clear in the past six months, especially after global equity markets experienced a huge selloff. Investors need to know the extent of rate hikes by the US central bank to determine its impact on global growth.
Stock indexes on Wednesday
After the release of Fed minutes at 2 p.m. EDT, the stock indexes experienced ups and downs initially. However, most of the stocks slowly gained a steady ground for the rest of the day.
The S&P 500 rose by 0.36% and closed at 3,845.08. The Dow Jones Industrial Average increased by 0.23% and reached 31,037.68 during closing. The Nasdaq Composite also grew by 0.35% to 11,361.85. Eight S&P sub-sectors also closed higher on Wednesday, including the utilities and technology sub-sectors.
Unfortunately, the energy sub-sector went down by 1.7%. It happened likely due to the fall of crude oil which reached its lowest value in the last three months.
According to the report, the U.S. central bank will likely make a 0.75% increase in the interest rate. This increase is the highest that the country has seen since 1994. This increase might be discussed further during a policy meeting on July 26-27.
Regular households have seen the direct impacts of inflation, mainly the spike in daily necessity costs. Industries also experience issues in the lack of new orders which also influences the labor market.
The Fed has an intention to keep prices under control during the ongoing inflation. It also wants to address people’s loss of faith in the role of the central bank. The Fed minutes reported the biggest risk of current inflation surge which is “that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted”.
Based on May’s data, consumer inflation had reached an annual rate of 8.6%. The rate defied the Fed’s expectation that the annual inflation rate had peaked in spring this year. Currently, the Fed wants to bring the inflation down to 2%. There is a need to convince the public that “a restrictive stance of policy” is necessary so that the country can hit that target.
Analysts believe that the Fed still considers a rate increase between 0.50 and 0.75 points. The Fed needs to analyze the impact that the increase will bring to the economy. Investors are concerned that the effect might be "larger-than-anticipated".
Jason Pride, an investment officer of Glenmede’s private wealth, said that “the 50-75 debate just points towards where you end up”. A 0.50 increase can lead to a 3% rate, while a 0.75 increase may end at either a 3.25% or 3.5% rate. When the rate goes 3.5% or above, the likelihood of recession can reach 50%.