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The Fed May Not Have To Be As Aggressive As We Thought

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By Craig Erwin, Ph.D.

The Federal Reserve (Fed) is the U.S. central bank. It is meeting right now to decide how and when to raise interest rates. Goldman Sachs, a respected investment bank, believes the Fed could raise interest rates four times this year, but warns that even more rate increases may be necessary to fight inflation. The Fed probably hopes that rising rates will not only slow inflation, but also burst asset bubbles like the one in stocks, causing prices to fall sharply. An asset bubble occurs when surging prices cause assets to become outrageously expensive.

The Fed has been hinting at the need to raise interest rates for a while. But the past few weeks have seen stock prices tumble more rapidly than the Fed would probably like. Now the Fed may be worried that the carnage on Wall Street could affect the real economy, adversely affecting retail sales, consumer sentiment, and the like.

Thanks to the stock market sell-off, the Fed may not need to raise interest rates four times this year (or at least not as quickly). And the Fed may not need to raise rates at all next year because the International Monetary Fund (a global organization formed to maintain financial stability, reduce poverty, and increase employment, trade, and economic growth) just warned that both global and U.S. growth will slow sharply this year. The Fed may fear that it will make matters worse if it raises interest rates too fast, further damaging U.S. economic growth.

So the wild stock market action this year may have made the Fed’s job easier. It may need to do less than planned, thanks to a stock market nosedive and a pessimistic IMF forecast. The Fed may well be able to relax and sit on its hands before year-end, giving the stock market and the economy a chance to rebound.

Do you pay attention to the Federal Reserve? Have you been concerned about the stock sell-off? Have you panicked? If so, what did you do when you panicked? Do you understand the importance of buying and holding, instead of trading frequently or trying to time the market?

For more information on the Federal Reserve, the stock market, and the economy, click on the links below:

Don’t Panic & Sell: Buy & Hold & Stay The Course
To Build Wealth, Accumulate Assets, Not Debt
Brace Yourself: 2022 May Be A Wild Year
Even Experts Get Proven Wrong By The Stock Market

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