Markets are cheering the fed rate hikes 2022 by 75 basis points announced at the end July. Soon after the Federal Reserve announced an interest rate increase 2022, stock markets regained their buoyancy as stocks rallied. The Tech-heavy NASDAQ index moved the most, and the fall in short-term treasury yields indicated an easing of the monetary policy anytime soon. The market reaction seems curious because the latest Fed decision about rate hikes 2022 did not involve deliberations among various stakeholders. Moreover, the Fed did not indicate a coming pivot from its aggressive approach.
How the Market is seeing the Fed Rate Hikes 2022?
Instead of trying to delve deeper to understand the dynamics underlying the decision of interest rate increase 2022, the markets are happy to see what they want to see. From the data accumulation, it seems there could be a reason for Fed to ease off on the policy.
The signals about inflation slowing down are pretty visible. Most commodities have slid down from their peaks, and the market appears to be bearish as prices are down by almost 20%. Michigan University’s consumer surveys painted an optimistic picture amid falling gasoline prices that could translate into a 2.8% decline in July inflation.
In the second quarter, the gross domestic product fell by 0.9%, the second consecutive fall that hints at a recession in technical terms.
Investors foresee a Higher Stock Valuation
Investors feel encouraged by the developments as they foresee an end to the fight against inflation. Consequently, they anticipate rate cuts from Fed while banking on lower rates that could translate into a higher valuation of stocks. However, investors’ view seems to be an oversimplification of the ground reality as they overlook some concerning aspects that can cause headwinds and volatility.
What should Investors keep in mind?
Investors should remember that there is some lag between implementing a policy and feeling its economic impact. The current federal interest rate tightening cycle is the most aggressive step taken in more than 40 years, yet rates have risen by 2 percentage points over the past four months. And there are indications that more rate rises are in the offing. The central bank faces a unique challenge in managing Fed rate hikes while reducing the size of its balance sheet. As we can see in front of us, the challenge remains the implications of tighter financial conditions and higher interest rates.
The economy faces several uncertainties and headwinds that can impact the interest of investors. The lingering impact of COVID, China’s economic recovery, and the Russia-Ukraine war are things the Fed cannot control. The strong job market could increase wage pressure and affect corporate profitability.
With so many unknowns, it seems that the current cheerful mood of the market because of the fed rate hikes 2022 is overly optimistic.
