Facing persistent inflation, the Fed delivered its largest rate hike since 1994 on Wednesday.
The increase is the monetary-policy equivalent of stomping on the country’s economic brakes — sharply increasing the risk that growth contracts.
Despite the recent beating shares have taken, the Fed’s announcement was greeted with open arms by investors. The S&P 500 rose 1.5%. The Nasdaq rose 2.5%. Interestingly, the Russell 2000 — which is more closely tied to short-term ups and downs of the economy — rose less, at just 1.4%.
The big picture: A huge rate hike that raises the risk of recession may sound like a bad thing for stocks — but with inflation still rising, it isn’t.
Essentially, investors are saying they prefer a big, sharp Fed-induced economic shock now if it quickly gets inflation under control. In theory, that could allow lower rates to return after inflation is vanquished.
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