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Interest rates – A tool to “cool down” when inflation is high

Inflationary of the US is at the highest possible level in the past 40 years. There are several factors that experts say are responsible for it being so high.

The first is government money pumped into households to help them get through the COVID-19 pandemic. Both former President Trump and President Biden signed an order to pump trillions of dollars into the economy in both 2020 and 2021.

The bailouts are seen as fuel to kick-start the economy after the pandemic, but a hot start is not good either. Especially the relief that was then supposed to arrive at an unnecessary time.

The next hit was the geopolitical conflict between Russia and Ukraine earlier this year. The conflict caused the world oil price to rise, food and grain prices also increased due to the affected supply

And when inflation has reached worrisome levels like this, a measure needs to be taken to cool down the economy. That’s when the US Federal Reserve FED took action. Job interest rate increase will cause people to borrow money to buy a house to buy a car to pay a fee and thereby reduce the temperature of the price increase of goods or houses.

Interest rates - A tool to cool down when inflation is high - Photo 1.

Mr. Jerome Powell, Chairman of the US Federal Reserve. Photo: AP

Thus, this rate hike of the Fed is necessary to brake the upward momentum of inflation. Previously, every time the Fed raised interest rates, the stock market fell into a state of concern. This time, the market kept the green color. The Dow Jones index bounced up 900 points. This decision of the Fed is in the prediction of stock investors. The percentage increase in interest rates is also within what the market considers comfortable.

The US market reacted positively to the decision of the Fed

The trading session on May 4 on Wall Street focused attention on the press conference of Fed Chairman Jerome Powell, where he announced the results of the recently concluded session of the Open Market Committee – the head of policy decisions. of the Fed.

Jerome Powell, Chairman of the US Federal Reserve (FED) said: “Today we agreed to raise interest rates by 0.5 percentage points and if macro conditions are as expected, we will continue to consider this increase in the next meetings. The Fed is not considering an increase of 0.75 percentage points at the moment.”

After the announcement from the FED, the market quickly prospered from a volatile trade, and the main indexes simultaneously increased strongly. Closing the session, the S&P 500 composite index rose nearly 3% – the biggest gain in a session since 2020 so far.

All 11 industry groups of this index gained, led by energy group in the context of still high global fuel prices. The green color also covered most of the market, with the ratio of up to 4 advancers to 1 decliner.

According to experts, the most obvious positive effect is that the Fed insists that it will remain loyal to the 0.5 percentage point increase, not yet stronger at the current stage. Investors see that borrowing costs increase at an acceptable level and have a clear path, avoiding the risk of pushing both the market and the economy into chaos.

“What the Fed wants is a ‘soft landing’ where the economy can slow down a bit but not into a recession,” said Sam Stovall, chief investment strategist at research firm CFRA. Despite a decline in GDP in the first quarter, we maintain our forecast that in the period from the second quarter to the end of the fourth quarter, the economy will grow by about 3% per quarter, which means there is no recession.”

While the general sentiment was quite bright, there were still some big stocks that turned down in the session 4/5, such as Lyft app after reporting the first quarter report did not meet expectations. That shows that despite being optimistic, investors will still have a headache because many other factors dominate the market. However, at least, concerns around the Fed’s interest rate issue have been temporarily pushed back.

Before the Fed meeting, several central banks also raised interest rates and this raised the question of whether or not there will be a wave of rate hikes by banks – especially emerging economies. ?

According to analysis from experts at Bank of America, there will be many emerging Asian economies calmly standing out of this interest rate race. For example, the Central Bank of Thailand has kept interest rates unchanged at 0.5% for nearly 2 years. Indonesia’s central bank also kept interest rates steady at 3.5%, while Malaysia’s central bank is likely to keep interest rates at 1.75% until the third quarter of this year.

Interest rates - A tool to cool down when inflation is high - Photo 2.

Emerging economies prioritize economic recovery

Normally, when the Fed raises interest rates, other emerging economies are also under pressure from capital outflows from the region, and must also increase. What’s different this time?

According to some experts of credit rating agency Fitch, emerging economies in Asia will not be in a hurry to raise interest rates because they are still prioritizing economic growth. Inflation is low. Besides, their currency is also quite stable against the USD like in Indonesia. In addition, there are many things to worry about such as raw material prices are constantly increasing, so there will not be a wave of massive interest rate hikes.

The Fed’s tightening of policy and shrinking balance sheet will of course reduce the flow of cheap capital somewhat as Brazil had to raise interest rates to a two-decade high.

Thus, when the market was concerned about a somewhat hawkish policy, the FED aimed for a soft landing with a dove-like character: both controlling inflation and not affecting the economic recovery. Fed Chairman Jerome Powell thinks this is doable. The certainty and confidence and the Fed also added confidence to investors that the US economy is still under control.

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