Few investors should have been surprised when the Federal Reserve raised interest rates after its May meeting.
Throughout April, Fed Chair Jerome Powell and several Fed Governors talked about the need to keep raising short-term rates to help manage hot inflation. They suggested that a series of rate hikes throughout the summer may be necessary to cool prices.
What should have surprised investors was the reaction by the financial markets.
As the May meeting came to a close, markets cheered as traders expressed confidence the Fed would be able to guide the economy to a “soft landing” and avoid a recession. But in the days that followed, stock and bond market volatility picked up as the reality of higher interest rates started to settle in.
What’s next? Fed Governors have prepared us for higher short-term rates in the coming months. But some economists point out that the bond market has already done some of the work for the Fed, meaning traders have already pushed longer-term interest rates higher. For example, the yield on the 10-year Treasury has doubled this year.
We’re in a transition period with the economy. High inflation is forcing the Fed into a cycle of raising interest rates. It’s best to prepare for more volatility as the markets adjust to what’s ahead.