The Fed’s Rate Hike… and What It Means for Wary Investors
Amanda Heckman|May 7, 2022
The Fed raised rates again this week.
And it was an aggressive, 50-basis-point hike… the biggest in two decades.
The market cheered for what felt like a minute… beforepromptly erasing any gains on Thursday and resuming its fall off a cliff.
Although the Fed stuck to its word and gave us a more aggressive hike… the end result we’re facing hasn’t changed.
The markets seem to be getting what we’ve been saying they’d get all along.
And so is the average, unaware American.
A Red-Hot Mess
The Fed has put itself into a tough position. It desperately needs to raise rates to clamp down on the red-hot inflation of its own making. At last check, inflation was at a 40-year high of 8.5%. (The rate for April comes out next week.)
But higher rates mean the cost to borrow money also rises. And that’s a problem with three ugly heads.
Small businesses – which grew at an unprecedented rate during the pandemic – will be hit hard.
They’re already dealing with rising costs and wages thanks to inflation… Now owners will find it more costly to expand, buy equipment and stock inventory. And many existing loans will effectively become more expensive thanks to variable rates.
Prospective homeowners will continue to be priced out of the housing market.
Insane sale prices already made buying a house tough… but sustained higher rates will make it even tougher.
Rising rates will cool the housing market down… but also make it more expensive to take out a mortgage. Mortgage rates have already jumped to 5%… a figure not seen since 2009. Those rates will continue to rise… putting owning a home out of reach for many Americans.
But here’s the biggest and ugliest head… and why we think the Fed won’t get too far with its plans…
The stock market’s free-money party will come to an abrupt end.
The Path Is Clear
We’ve long said that stock buybacks have been the fuel for the market’s rocket ride in recent years. And the research backs us up… A full 40% of all gains over the last decade have come from buybacks pushing share prices higher. Without them, the market would have grown at a paltry 3% per year.
Companies have been able to use cheap money to buy their own shares and take them off the market… pushing share prices higher and higher.
When that’s no longer possible thanks to rates that get juuuuust too high… we could see a bloodbath.
So what will Jay Powell do?
As soon as the warning sirens start… he’ll back off, taking us right back to square one.
Rates will stay low… inflation will persist… growth will stagnate… and we’ll all pay the price.
Amanda Heckman|Editorial Director
Amanda Heckman is the editorial director of Manward Press. With unrivaled meticulousness, she has spent the past dozen or so years – give or take a few sabbaticals – sharpening Andy’s already razorlike wit. A classically trained musician and a skilled writer in her own right, Amanda takes an artistic approach to the complex world of investing. Her skill has led her to work with numerous bestselling authors, award-winning financial gurus and – lucky for us – the fine folks at Manward Press.