US Fed Hikes Interest Rate, Biggest In Last 2 Decades: Impact On Investors

The US Federal Reserve, the country's central bank has finally raised the interest rate by half a percentage point. The Fed has taken this aggressive step to control the 40 years high inflation rate. The markets were already ready for the decision. Analysts were anticipating this rate hike, in line with Fed Chairman's hawkish tone. The Fed is expected to initiate multiple 50 bps interest rate hikes this year, to fight against the climbing inflation rate.

The Fed Chairman Jerome Powell commented "We raised by 50 bps today, and there is a broad sense within the committee that additional 50 bps should be at the table for the next couple of meetings...We'll make our decisions meeting by meeting as we learn from incoming data. The overarching focus is to bring inflation down to our 2% goal." Powell added, "Inflation is much too high and we understand the hardship it is causing. We're moving expeditiously to bring it back down." The Fed is 'strongly committed to restoring price stability.'

The US Fed is also expected to initiate a reduction in asset holdings on its $9 trillion balance sheet. The country's central bank was buying bonds from the markets for keeping the interest rate low. However, as the pandemic has passed significantly, the Fed is trying to squeeze the liquidity infusion into the economy. This will eventually help the Fed to control the inflation rate faster. The gain in crude oil prices and supply chain disruptions during the pandemic has pushed the inflation rate higher globally.

The gold markets and equity markets are reacting normally, as this rate hike was much expected by investors. A more hawkish stance could impact the markets more sharply. However, with the interest rate hike, government bonds will be more lucrative, hence, people can be less interested in gold and equities in the long term. Indian markets are reacting in line with that.