Stock futures reverse post-Fed rally as traders reassess biggest rate hike since '94

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The Federal Reserve on Wednesday implemented its largest interest rate hike since 1994, taking the threat of inflation seriously by intensifying its campaign against surging prices. Another 75 basis point hike – or a 50 bps move – is also in the cards for the meeting in July, according to Fed Chair Jerome Powell, who is just beginning to show his aggressive side. Stocks initially sold off on the news, before climbing into the close in somewhat of a relief rally, but the gains didn’t hold overnight as futures stumbled early Thursday. Futures as of 4:00 a.m. ET: Dow -1.8%; S&P 500 -2%; Nasdaq -2.3%.

Cue the uncertainty: “We don’t seek to put people out of work,” Powell said at a press conference, adding that the central bank is not trying to induce a recession. “Of course, we never think too many people are working and fewer people need to have jobs, but we also think that, you really cannot have the kind of labor market we want without price stability. It’s not going to be easy, and it may well depend, of course, on events that are not under our control.”

“The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine is boosting prices for gasoline and food and is creating additional upward pressure on inflation,” he continued, giving an example of outside pressures. While the war has definitely exacerbated the situation, the Consumer Price Index has been climbing rapidly since March 2021, which was a whole year before the Russian invasion. Powell himself also “retired” use of the word “transitory” last November, which was several months before the onset of the war and the severe sanctions that followed.

How will it affect the average American? Despite the largest rate hike in three decades, it will take some time for the higher borrowing costs to cool demand and make their way into the economy. Mortgage rates will continue to go up, as well as cars loans and credit cards, making it much more expensive to borrow cash. The hikes also won’t impact the supply side, which the Fed largely attributes to soaring gas and food costs. In terms of retirement funds, things will largely depend on whether the market believes the Fed will be successful in pulling off a “soft landing,” by stabilizing inflation without denting economic growth.