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While the switch from a 75-basis point to a 50-basis point hike may not seem like a huge deal, it is an important shift. The problem with interest rate policy is that while rate hikes go into effect immediately, their impact on the economy as a whole takes a lot longer to work through the system.
Statements by Fed Chairman Jerome Powell on August 26th poured cold water on the stock market rally. Powell has been using strong language to reiterate the Federal Reserve's position that tackling inflation remains the central bank's number one priority, and they intend to maintain this policy even if it causes "pain" to the markets or economy.
The Fed has tremendous influence over the economy and the markets. After years of stimulus, it must navigate an unenviable balancing act of combating inflation without rattling confidence in the markets.
Owning bonds today is still relevant because they provide steady income and protect portfolios when risky assets fall. If you rely on your portfolio for spending, the bond portion should protect your spending level.
The rate at which the Federal Reserve has been purchasing assets is more than we have ever experienced. What signals does that send to investors, and how does the stock market react when the Fed buys or sells assets?