The Federal Reserve’s Open Market Committee met last week and raised their base interest rates by one-quarter of one percent. As mentioned previously, the betting line just a few weeks ago was for an increase of one-half of one percent. This smaller measure is being attributed to the Fed being mindful of the effects the Ukraine invasion is having upon the world. But the truth is that the Fed could not risk ignoring the inflation factor.
Thus, what you had was a balance. A smaller step today, but stronger language regarding the future of rate increases. Absent of significant intervening factors, there is no doubt that this action is the first of several this year by the Fed. What intervening factors could cause the Fed to stop in their tracks? Certainly, an escalation of the Ukrainian conflict or a downturn in the economy due to previous or subsequent economic sanctions. Let’s add an escalation in the COVID pandemic, which presently seems to be fading as the weather gets warmer.
The truth is, we don’t know what factor could halt the Fed’s plans to continue to raise short-term rates this year. The market has already anticipated these increases, with long-term rates such as mortgages rising well over 1.00% in the past months. With inflation raging and the economy continuing to recover strongly, the future seems to be set — save the previously mentioned known or unknown factors. While inflation is the current economic enemy, the fact that the economy is strong is a good thing, buoyed by the reality that the world is getting back to normal, with a watchful eye upon the Ukraine factor.