May 10, 2022

The Federal Reserve Board met last week and raised the Federal Funds and Discount Rates by 0.5%. This action was expected and the markets extremely volatile in the last few months in anticipation of such a move. After the meeting, the markets resumed their volatility, especially with the jobs report coming two days after the Fed announcement. Job growth continued to be robust in April, also not a surprise.   

The markets had already “baked in” this increase and the next few rate increases by the Fed. Thus, the markets were more focused upon what the Fed would say in their statement after the meeting. We could have written the statement before the meeting as well. We expected that the Fed intimate that this would not be the last rate increase because they are going to be diligent against inflation.

We wonder how the message might change if the economy slows down this year as many have predicted. The preliminary reading on economic growth for the first quarter came in at a negative 1.4%, well below the readings from last year. Could the fear of a recession slow the Fed’s efforts against inflation? Theoretically, a slower economy is likely to slow inflation as well. Of course, the war in Ukraine could exacerbate inflationary pressures even as the economy slows down. This already has been an interesting year and it is about to get even more interesting.

Source: Origination Pro

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