In June, the Federal Reserve elected to stop increasing interest rates after 10 consecutive hikes. As evidenced in the chart below, the hawkish monetary policy implemented has helped to reduce inflation by decreasing the amount of loans and borrowed money in the economy. Although there has been a slowdown in inflation, Federal Reserve Chairman Jerome Powell has stated that the fight against inflation is not over and alluded to future rate hikes in this calendar year.
Due to the rise in interest rates, the yield curve has become inverted. This phenomenon began in April of last year and has become more pronounced with each subsequent interest rate increase. An inverted yield curve signifies that short-term bonds will likely produce higher returns than long-term bonds. While an inverted yield curve has historically signaled an impending economic recession, the current increase in interest rates has not resulted in a significant decline in economic activity and the job market continues to grow steadily. However, the elevated interest rates may make it more difficult for individuals and businesses to obtain loans, leading to less lending by banks and a potential slowdown in the economy.
There was concern that the US stock market may have been heading towards a recession due to frequent interest rate increases. However, the market has bounced back and is experiencing a bullish trend since the hikes have paused. Furthermore, the CBOE Volatility index is at its lowest level since February 2020. The overall market outlook remains murky with several mixed signals and the possibility that a economic slowdown could still ensue as the Information Technology stocks that spiked to start the year may not sustain gains.
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