In conversation with UC Berkeley's Fisher Center, San Francisco Fed President Mary Daly made direct comments that the Fed could begin to taper out on the pace of hikes, with potentially a smaller hike to come in December, after plans to raise interest rates by 3/4th of a point in November. She caveated this by pointing out that more interest rate increases are needed "to get us into restrictive territory", in regards to getting inflation under control.

Not everyone was quick to jump up at the news. Anthony Saglimbene, chief market strategist at Ameriprise Financial, said that "it/s wishful thinking", referencing the slowing pace of rate hikes. He went on to say, "...they painted themselves into a corner when they left interest rates at zero all last year".

The central bank's continued rate hikes have been a major contributor to stocks falling into bear territory. Higher interest rates means a greater discount (higher cost of capital) on future company earnings (i.e. discounted cash flow methodology) and this makes equities less attractive relative to bonds. Higher interest rates also directly impact company performance because it increases their costs, which they pass down to consumers in the form of higher prices - this chain reaction further exacerbates inflation.

This sounds counterintuitive to using higher interest rates to bring down inflation. If interest rates are high enough, companies will borrow less (because it becomes too expensive) and consumers will spend less. When spending falls, demand falls and lower prices follow suit. The famed Paul Volcker, Fed Chair from 1979 to 1987, was widely credited with bringing down inflation from peak 14.8% to below 3% in the span of three years. He did this by aggressively raising the federal funds rate to ~20%.

In the process of reeling in inflation, this strategy also led to several negative consequences including unemployment levels of almost 10%, large budget deficits, and sky-high mortgage rates. Volcker intentionally engineered a stagflation in order to force inflation down. While this caused great pains for many Americans, inflation was back to the target of 2% and the economy was thriving.

The question on everyone's mind - how did we get here? Many point fingers back at the Fed, which slacked interest rates to 0% during peak of COVID-19 to keep the economy churning in a time of slowing supply and demand. The Fed's goal was to minimize the impact of the pandemic on the economy; however, many say that the Fed overcorrected and created "artificial demand" or "easy money" that kept stocks and home prices elevated, resulting in a bubble. During 2020 and 2021, the U.S. government injected almost $5 trillion into the economy via stimulus checks and bond buy-backs (which bloated its balance sheet). That was not the first time in history that the Fed slashed interest rates to 0%. The Fed utilized a similar strategy in 2008, which many believe, is what caused the Great Financial Crisis, because it pushed people and companies into taking oversized risks.

Some say that the Fed is not doing enough, others say that the Fed is too late to act and it's a moot cause, and yet others say that the Fed is overacting and should let the economy correct on its own. Hindsight is always 20/20 and it's difficult to say now whether the Fed's actions will help the economy spring back into shape or whether they will exacerbate the problem. However, the one thing that most can agree on is that companies and consumers should keep a steady hand, not panic, and prepare for hard times ahead while hoping for the best.