US Federal Reserve Raises Interest Rates by 25 Basis Points Amid COVID-19 Concerns

The U.S. Federal Reserve on Wednesday raised interest rates by 25 basis points, against the widely expected 50 basis points. The leading central bank was expected to move aggressively by at least 50 basis points in its next three meetings if it must curb escalating inflation rate and rein in high consumer prices eroding household income.

In its press release, the Federal Reserve attributed its decision to go slower than expected to a series of uncertainties in the global economy. The apex bank mentioned the uncertainty surrounding Russia’s invasion of Ukraine and the COVID-19-related lockdowns in China, the world’s second-largest economy.

Earlier this week, China was reported to have extended its COVID-19 lockdown restrictions in key cities to slow down the spread of the virus and avert a total shutdown of the economy like in 2020. The report bolstered commodity prices and extended crude oil’s bullish run, largely because China is the world’s largest importer of the commodity.

From the Fed statement, it can be deduced that the central bank is already preparing for a possible spillover from China and Ukraine. Hence, the reason for holding its trigger even with inflation at a record-high of 8.5%.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain. The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks,” the Federal Reserve stated.

In addition to the 25 basis points increase, the Fed will start reducing its balance sheet by cutting down on its treasury securities, debt and mortgage-backed securities holdings as early as June 1, 2022.

“The Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in conjunction with this statement,” the statement read.

What Does This Mean?

Going by this Federal Reserve decision, I will expect the dollar index to start moderating and give back some of its recent gains. Also, the stock market should pare losses and rebound moderately as rising global uncertainty is expected to still be dragging on them.

The cryptocurrency space should come moderately alive in the meantime. Heaven assets like Gold, Yen, Dollar, etc will pull back in the near time.