US Fed Minutes: More interest rate hikes to come? How does it affect your investments?

US Fed Minutes: What Happened?

The US central bank on February 22 released the minutes of its previous monetary policy meeting in which the central bank revealed that it is planning for more interest rate hikes to curb elevated inflation levels. 

However, the pace of these interest rate hikes will be slower with expectations of a 25 basis point rate hike going ahead compared to the 50 basis point rate hikes seen earlier. 

The Minutes of the meeting clearly stated that inflation “remained well above” the Fed’s 2% target. That came with labor markets that “remained very tight, contributing to continuing upward pressures on wages and prices.“

US Interest Rates: Historical Interest rate changes

US Fed Minutes: Why is the US central bank increasing interest rates? 

Inflation has been a steady problem in the United States since 2021 when global central banks embarked on their journey to cut inflation by hiking interest rates. Latest data, whether it be core CPI inflation, WPI inflation or consumption expenditure data, all highlight that inflation levels continue to remain elevated.  

The US central bank has an inflation target of 2% and currently inflation in the US languished around the 4.5% range. 

US Fed Minutes: What it means for your investment? 

The biggest effect of rising interest rates is on technology shares and invariably the fixed income or the bond market.  

Technology shares like Apple, Amazon, Google, Netflix, Spotify, Shopify among others do not really do well in a high interest rate scenario. 

The reason is because these stocks are termed as growth stocks and their current value is determined by their future earning capacity. When interest rates rise, the future earnings capacity of these stocks dims because borrowing capital becomes more expensive, leading to margin erosion. 

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.