Hike rates

US Fed to hike rates 1.25% before calendar year end

So far in 2022, the US Fed’s rate hike has been around 300 basis points. In addition, two more rate hikes are scheduled for November and December. Market participants expect the Fed to raise its benchmark rate by 0.75% in November and by 0.5% at its December 2022 meeting. Overall, the Fed will most likely raise interest rates by An additional 1.25% before the end of the calendar year, due to persistent inflation data.

The US Fed observed in its latest “Beige Book” that while the economy has grown somewhat, conditions continue to vary by district. He also mentioned how the high interest rate and inflation are making American businesses more pessimistic.

The Fed is raising rates to reduce demand, following overwhelming new job creation. “Rising interest rates lead to slower demand, which translates into lower GDP growth rates,” says Ram Kalyan Medury, founder and CEO of Jama Wealth, an investment advisory firm.

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Medury explains how the Fed planned to depress demand through rate hikes – Rate hikes increase the cost of funds for businesses, especially indebted businesses, which reduces their bottom line profits. Weaker demand and a higher cost of funds can slow business spending. This can lead to a slowdown in private investment. Companies may also resort to layoffs as a cost-cutting measure. This may again have an impact on the demand for discretionary purchases.

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As the cycle repeats itself, a slowdown in economic activity leads to lower growth rates. In calendar year 2022, the Fed raised interest rates by 300 basis points (3%). According to the Fed’s own estimates, GDP growth for 2022 should be 0.2%. With further rate hikes, the coming quarters will be difficult for the US economy.