Federal Reserve announces biggest interest rate hike since 2000

Yahoo Finance Live anchors discuss the Fed’s 50 basis point rate hike.

Video Transcript

- What happened? I thought it was a raging bull market, Julie. But here are three things you need to know right now. The Federal Reserve announced a 50 basis point rate hike yesterday, the biggest increase since 2000.

This is the latest move to fight red hot inflation bearing down on the wallets of US consumers. Yahoo Finance's Brian Cheung is with us. I should say, Brian, back with us. You were in that room yesterday at the Federal Reserve. What was your interpretation of what Jerome Powell said?

BRIAN CHEUNG: Well, I mean, first of all, we have to acknowledge just the unprecedented nature of what happened from the Fed. They haven't raised by more than 25% basis points in one meeting since 2000. At the time, it was N Sync topping the charts. Razor scooters were all the rage-- a long time ago.

And really, what we kind of saw was that the Fed is not necessarily looking to 2000 as an example but the Paul Volcker era of high inflation and then the consequentially higher interest rates. Now Volcker came up in many, many mentions during the press conference yesterday, but what caught a lot of attention was whether or not the Federal Reserve was going to further get more aggressive with perhaps maybe a 75 basis point move. But the Fed chairman saying not likely a chance. Take a listen to what he said yesterday.

- 75 basis point an increase is not something the committee is actively considering. What we are doing is we raise 50 basis points today, and we've said that, again, assuming that economic and financial conditions evolve in ways that are consistent with our expectations, there's a broad sense on the committee that additional 50 basis increases should be on-- 50 basis point increase should be on the table for the next couple of meetings. So we're going to make those decisions at the meetings, of course, and we'll be paying close attention to the incoming data.

BRIAN CHEUNG: And it was exactly when the Fed chairman made those remarks in the middle of the press conference that we saw the S&P 500 and markets react very positively to that, perhaps because markets were pricing in a more hawkish Jay Powell in the press conference yesterday. Interesting to note, though, that he's setting what at least Deutsche Bank is calling a speed limit for policy later on this year. If it's only going to be 50 basis points in the June and July meetings, then that sets at least a little bit more certainty in markets over what to expect at least over the summer.

- Saying that he's paying attention to incoming data. What could they potentially see in the data that would have them change course at all at this point?

BRIAN CHEUNG: Well, I mean, the Fed chairman has made it very clear, at least for right now, it's only whatever's going to be coming out of those CPI, PCE, perhaps the employment cost index reports. The employment data, which we're going to get a fresh read on tomorrow, is certainly relevant from the context of we want to see more people still come back into the labor market to plug some of the holes that we've seen these hiring firms have struggles with.

But at the end of the day, what the fed has already acknowledged is that unemployment has essentially gotten back to pre-pandemic levels. Mission accomplished on that front. The Fed needs to hike rates to get ahead of inflation.

So those reports are really going to be the bigger story here. But the Fed chairman was also very clear. Look, if inflation ends up higher than expected for one report, that's not going to suddenly incentivize the Fed to go 75 or 100, 125 basis points in the next move. They're going to be data dependent, but they're not going to look at just a single month's worth of data and then very much change their policy.

- Yeah, I have two thoughts following on it, especially following on the market reaction. One, you know, market participants tell us time after time, the Fed's behind the curve, behind the curve, behind the curve. But don't get too far ahead of the curve, Fed.

It's really this delicate balance, right? Like, don't do 75 basis points even though we want you to be aggressive. Not that aggressive.

And the other thing that I took away from-- he emphasized again that the Fed does not have any control over the supply side of inflation, right? They control the demand side. And I'm really curious going forward how much the demand side also is going to take care of itself, right? We are seeing some commentary start to filter through about demand falling back.

BRIAN CHEUNG: Yep.

- You know, are high prices themselves going to be a demand destruction mechanism? You know, I think all that's going to have to play out.

BRIAN CHEUNG: And that was exactly the crux of the question that I asked the Fed chairman. I said, what we saw in the early 1980s when the Volcker shock was being implemented, ratcheting up interest rates, is exactly that. The point is to destroy demand. That's what the Fed is doing when they're raising interest rates. So I asked the Fed chairman, is what you're trying to do here literally telling Americans stop consuming as much?

- Right.

BRIAN CHEUNG: Or tell businesses stop investing as much? And the Fed chairman didn't necessarily bite on that, but he did acknowledge that what higher interest rates do is kind of a less dramatic form of that. So when we talk about demand destruction, we're already starting to see companies in this earnings season say, we're getting some pushback from our consumers over more price increases in our goods or services that we're providing.

So that's already happening. But the question is, what is the right balance there? The Fed could have just raised interest rates to what they estimate as neutral to 2.5% yesterday. But I think for the Fed, they want to be more gradual with that process because you don't want to surprise markets. And I think that financial conditions is actually the bigger story than, say, exactly how households and businesses are responding.

- Was this market move yesterday, Brian, that was just completely overdone? Who cares if the Fed's not raising 75 basis points?

BRIAN CHEUNG: That's why you see futures reversing.

- What I'm saying here is that the Fed is still going to likely raise rates by 50 basis points at the next few meetings. That is still going to slow the economy, likely to still impact companies and their corporate earnings.

BRIAN CHEUNG: Yeah, well, I mean, but the question here is that through the rest of this year, you've heard the likes of San Francisco Fed President Mary Daly telling us about a week ago that the Fed needs to get to 2.5% on the short term rate by the end of this year. But the Fed's own estimates say that anything less than about 2.5%, it's going to depend on who you're asking, is still stimulative to the economy. It's not until you raise interest rates past that point that it's actually considered restrictive. Now again, this is just kind of economic speak.

- And he said he might go to restrictive.

BRIAN CHEUNG: He said-- I mean--

- If appropriate.

BRIAN CHEUNG: I mean, Powell is basically saying, look. I could turn it up if I needed to. And we have that option on the table.

But what's interesting is that if they wanted to leave that optionality, then why take 75 basis points off the table? That's a question that I've been hearing in terms of the Fed Watcher broad market commentary in the aftermath of the meeting yesterday. If you want to really be flexible, then why would you completely rule it out? Now the semantics of it might be important because it's not that Powell was saying they'll never do 75 basis points.

- They're not actively--

BRIAN CHEUNG: They're not actively considering it at the moment. And for right now, 50 basis points is only the cap for at least June and July. But look, we've got six weeks until that next meeting. And in six weeks, a lot can happen.

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