U.S. Fed Chokes Financial Markets On Rate Hike

As central banks do battle with the worst inflation for a generation, they are putting the easy-money policies of the past decade into reverse.

Photo Insert: Though share prices jumped after the Fed’s rate rise—in apparent relief that it is not tightening faster—financial markets have been adjusting painfully to the reality of tighter money.

This week, the US Federal Reserve raised interest rates by half a percentage point and announced that it would soon shrink its portfolio of bond holdings, The Economist reported on May 7, 2022.

The Reserve Bank of Australia, which not long ago was predicting it would keep rates near zero until 2024, surprised investors by increasing them on May 3rd by a quarter-point. As The Economist published its weekly edition, the Bank of England was expected to raise rates to their highest level since 2009.

Though share prices jumped after the Fed’s rate rise—in apparent relief that it is not tightening faster—financial markets have been adjusting painfully to the reality of tighter money. In truth, the stock market made a killing as easy money flooded the world in a bid to cushion the impact of the COVID-19 pandemic.

Global stock markets fell by 8% in April and are down by 11% in 2022 as investors price in higher rates and lower growth.

On May 2, America’s 10-year Treasury yield, which moves inversely to prices, briefly hit 3%, nearly double its level at the start of the year. However, the market had already made a killing as inflation rates surged and the US Fed acted rather late to check rising prices.

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