On Wednesday, the 4th of May, the US Federal Reserve announced an interest rate increase of 0.5 percent or 50 basis points. The unprecedented hike was the highest since the year 2000. Moreover, the Federal Reserve has also indicated that hikes of the same or greater magnitude may be expected in the future.

The aggressive hike came after an 8.5 percent inflation rate in March in the US, the highest since the year 1981. The hike itself was the first back-to-back increase since the year 2006.

Jerome Powell, US Federal Reserve Chair, laid plans to reduce the Federal Reserve’s Financial Position, starting with a major cut of $30 Billion and $17.5 Billion in Treasuries and Mortgage-backed securities, respectively this coming month of June. Furthermore, the Federal Reserve expects that the total amount will rise to a combined monthly cut of $95 Billion by September and beyond.

With the inflation rate at the highest rate in four decades, Federal Reserve Chair Jerome Powell addressed the American people in an upfront manner, expressing concerns about the difficulty caused by increasing prices (especially commodities, oil, and essential non-food items). He pledged to use all necessary and available monetary tools to bring the inflation rate to manageable levels.

Recession Fears

The interest rate hike will most likely raise all types of borrowing costs, from consumer debts such as credit cards and auto loans to mortgages and business loans. As a result, it will further slow down and significantly reduce the demand for goods and services essential to a healthy and robust economy.

Impact of External Events

With China’s current nationwide lockdowns deteriorating global supply chains, causing an additional pain point for the US economy. Another major event that cannot be ignored is the current crisis in Ukraine, which also negatively impacts the US economy since it has been elevating prices such as commodities (especially oil) and essential goods and services. Analysts have raised their concerns that elements beyond the US Federal Reserve’s control could undermine the goal of the Central Bank. The worst-case scenario would be plunging the US economy into a much-feared recession.

The Federal Reserve acknowledged the “highly uncertain” impact of Russia’s invasion of Ukraine and the continued western sanctions on Moscow, which are “creating additional upward pressure on inflation and are likely to weigh on economic activity.” The Federal Reserve said in a statement.

Hope Amidst Everything

The Federal Reserve Chair expresses that the US Central Bank remains confident and optimistic that the US economy is resilient enough to withstand interest rate hikes without risking a possible recession.

“It’s a strong economy, and nothing about it suggested… that it’s close to or vulnerable to a recession,” Powell exclaimed. The S&P 500 closed at 4300.16 on the day of the announcement, an almost 3% increase. It exemplifies that the market has already priced in the unprecedented interest rate increase, offering hope to the economy moving forward.