The Federal Reserve Raises Interest Rates by 0.75%

The Fed raised it’s benchmark interest rate by 0.75 percentage points, the biggest increase since 1994.

In a move to curtail the highest inflation rate in 40 years, the federal reserve raised the benchmark interest rate at its most aggressive hike since 1994. They also significantly cut their economic growth outlook for 2022, to just 1.7% gain in growth domestic product (GDP), which is down from its forecast of 2.8% from March. (Source: CNBC.com).

The Fed is playing catch-up after earlier in the year claiming that inflation was just transitory. Now they have no choice but to aggressively raise rates. The Fed is normally late to the game, and it continues to lose its credibility as a viable player to control economic activity. “Higher interest rates will do nothing more than hurt the economy”, says Greg Womack, President of Womack Investment Advisers, in Edmond Oklahoma. “Higher interest rates will curtail economic activity, where the issue is not just high demand, it’s also the low supply caused by the supply-chain shut-downs from the pandemic. The cost of doing business for US companies is going higher, and more pressure will be on the consumer, at a time when many are still feeling the pressures from the last two years.

Womack says, “when economic policy is encouraged to free-up more supply, such as energy and other technology products, this will help to bring prices down naturally. It’s not just about curtailing demand by higher interest-rates, it’s also about creating more supply in the system, which was extremely strained by the previous shut down of the economy. We are now feeling the effects of what happens when the government intervenes and shuts down the whole economy, these are the symptoms that appear. When you jack with the free-markets, it usually ends up in worst conditions. Take a look at the bubbles the fed has created over the last 20 years by historically low interest rates, only to be burst by raising rates too much”.

Policy changes are desperately needed to encourage the free-growth of energy production and fixing the supply chain limitations that are overhanging from the pandemic shutdowns. Until these issues are addressed head-on, you can expect high inflation to continue and a sluggish economy, Womack contends

For more information, you can contact Womack at greg@womackadvisers.com.