The Federal Reserve initiated its largest rate increase since 1994 last week, a 75 basis point gain exceeding all market expectations, according to Zillow. The Fed’s aggressive approach to cooling inflation is centered on first slowing the housing market, which is the largest driver of price growth throughout the country. The most recent rate hike pushed the University of Michigan consumer sentiment index to a record low, revealing the waning confidence of homebuyers even in an economy sustained by low unemployment rates.
Rates were gradually increasing throughout the week, then shot higher on Friday with the Consumer Price Index release. The CPI report showed increasing inflation in May, rising from 8.3% in April to 8.6%, higher than market expectations. Markets reacted to this persistent inflation with a large selloff in both fixed income and equity markets as fears of more hawkish central bank actions and recessionary pressures drove risk-off sentiment.
Markets are beginning to show more concern that the Fed must take more aggressive actions to tame inflation, which would increase the likelihood of a recession as the economy slows down. Interest rates have continued to climb this week in front of the FOMC meeting today with markets expecting a 75 basis point rate increase.
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