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The Fed To The Rescue (LOL)

Market Crunch Time       Rich Kasparian Blog   May 5, 2022

Once again, the Federal Reserve under Jerome Powell is late to the dance.

The Fed yesterday raised rates 50 basis points which is the single largest increase since 2000. Chairman Jerome Powell said that 75 basis point raises were off the table in the future. The fed funds rate is the percentage that banks lend to banks. The current target fed funds rate is .75- 1%. The Fed has also decided to use another option to quell inflation call Quantitative Tightening. This is a fancy way of saying that the Fed will let bonds they purchased (probably during quantitative easing) reach maturity so they are off their balance sheet. This in effect tightens the money supply which once again with a rate hike is used to reduce inflation. The factors that created inflation were mostly due to stimulus during Covid and supply chain issues.

When the Fed tightens there is always a concern that the money supply will be too tight for banks and create liquidity issues. The Fed last year added another tool called Standing Repo Facility which provides liquidity to the banking system (500 billion of cash overnight) along with other options to provide liquidity.

Going forward the Fed needs to stay on a tight rope with rates and avoid drastic hikes which can affect the market, housing and lending. The bottom line is that the Fed under Powell can try to artificially curtail inflation, but this is never a substitute for a booming economy with no supply chain issues.

Moving ahead make sure you have options in your portfolio that look to capture the upside in the market while striving to minimize downside impact in the current market.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual