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Should The Fed Entertain .75% Interest Rate Hikes Going Forward?

By Michele SchneiderMarket OverviewMay 08, 2022 04:16AM ET
www.investing.com/analysis/should-the-fed-entertain-75-interest-rate-hikes-going-forward-200623701
Should The Fed Entertain .75% Interest Rate Hikes Going Forward?
By Michele Schneider   |  May 08, 2022 04:16AM ET
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Inflation is a spotlight topic in the media with more reports and predictions surfacing every day. Since the Fed has been sorely wrong on its inflation predictions, the country is closely monitoring interest rate hikes.

With prices increasing and potentially looking to move higher, people are feeling the pain.

Cumulative Interest Rate Increases BP
Cumulative Interest Rate Increases BP

While the Fed's idea of transitory inflation was based on supply chain problems being temporary, we are seeing that fixing supply chains alongside the Ukraine war and persistent COVID variants is not so easy.

The Fed also failed to understand growing food products takes time and cannot easily be scaled back to pre-pandemic levels. Having said that, has the Fed finally grasped the severity of the inflation problem?

The above picture shows a cumulative interest rate increase in basis points (BPs) over a set number of days. Different colored lines represent the frequency of interest rate hikes in different periods. The green line shows 2022.

While the rate hike pattern for 2022 roughly aligns with the progression found in 1994 and 2004, it should also be noted that inflation was under 3% in both these years.

The last time inflation was over 8.5% was in 1981 at 8.9%.

With that said, while the Fed seems more aggressive with its rate hikes, this image shows the Fed is using about the same frequency of rate hikes compared to years with much less inflation.

Therefore, while the Fed did not want to go for a .75% rate increase this past Wednesday, it might need to in the near future.

What does this mean for the market?

Large rate increases are viewed as a negative for the market, however, high inflation and poor economic outlook also don’t bode well.

This doesn’t leave the Fed with a great situation to deal with, but possibly hitting the market with larger rates will benefit the economic outlook for the long run if inflation continues to push higher.

  • S&P 500 (SPY) 405 to hold.
  • Russell 2000 (IWM181 watch to hold.
  • Dow (DIA) 322 support.
  • NASDAQ (QQQ309.65 pivotal.
  • KRE (Regional Banks) If it can hold the current area. Watching for a move over 65.
  • SMH (Semiconductors) 253 resistance. 225.80 support.
  • IYT (Transportation) Needs to hold 237.
  • IBB (Biotechnology) Breaking down.  Looking for support.
  • XRT (Retail) 75 resistance. 70 pivotal.
  • GLD (Gold) Inside day.
  • USO (Oil) 82.48 resistance.
  • DBA (Agriculture) Could not hold 22.
Should The Fed Entertain .75% Interest Rate Hikes Going Forward?
 

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Should The Fed Entertain .75% Interest Rate Hikes Going Forward?

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Comments (5)
John Lakran
John Lakran May 09, 2022 10:17AM ET
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We will get one more interest rate increase and that's it. Demand is slowing down already so raising rates will not be needed.
Dion Argueta
Dion Argueta May 09, 2022 3:15AM ET
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With fuel prices and food prices rising along with other goods because of supply disruptions I beg to differ if the Fed should be raising interest rates at all, let alone aggressively??? Even though most companies beat their earnings theres a lot of companies that I noticed t least at the beginning of earnings season with sketchy forward guidance??? Any opinion on that front would be appreciated !!! Please comment if you have been looking at forward guidance it will help me and others see more ckearly what should unfold !!!!
Jeff Page
Jeff Page May 09, 2022 2:06AM ET
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The bond market went so volatile after the decision and even as JP spoke. Thursday and Friday bonds got it right, pushing rates up. Bonds told the Fed where rates should be.Higher!!!
Robert Brouillet
Robert Brouillet May 08, 2022 11:45AM ET
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I want to consider them intelligent, but what they say vs. what they do vs. the reselts I'm getting . . .
Shaheen Hays
Shaheen Hays May 08, 2022 11:45AM ET
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They are intelligent, but in my opinion their main focus is to weponize the dollar to debilitate russia no matter what the resumt of that is, so the fed is not doing what is best for the American people
Shaheen Hays
Shaheen Hays May 08, 2022 8:46AM ET
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They should but they wont
 
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