The Fed has plans to begin raising interest rates this week, but what does this mean for markets?
Interest Rates, which can be thought of as the cost of borrowing and a reward for saving, can be used to stimulate or slow down an economy. In our current case, our economy is operating as an unsustainable level of growth, which needs to be brought down for long term health. When there is a heavy imbalance in the equilibrium of aggregate demand and aggregate supply like there currently is, the Federal Reserve has to step in and bring the economy back to equilibrium. When demand outweighs supply, the shortages that we see now occur. This can also cause a rapid increase in inflation, an increase of the price level of the overall economy.
What does rising interest rates mean for the stock market? When the market is expecting a stable increase over time of interest rates, it is able to digest the news and price it in. Jerome Powell has said that he plans to propose a .25 basis point rate increase at this next meeting, which is expected to be agreed upon. It is also expected that at each meeting after this, the Fed will continue to raise .25, until rates reach 1.75% by the end of 2022. It is also likely that interest rates will continue to rise in 2023, possibly up to 4%. These higher interest rates will incentivize households to save more money as the reward for risk-free saving will increase, but business and borrowers will be less likely to borrow money as they will have to pay a higher rate of interest. This will lower demand, bringing down inflation, and bringing price stability.
Is this something to worry about? Generally, no. Stocks usually perform well in rate-hike cycles, like we are heading into this week, and while they may experience short term volatility, it is usually a good time to buy. As long as you’re a long term investor, you have absolutely nothing to worry about. It can be painful to see your portfolio down, but hold on to stocks you believe in and #BuyTheDip along the way. Of course this is not financial advice, just what has been proven to work for generations. It is also a good time to ask yourself “How much risk do I want?”. As interest rates go higher, you may (or may not) be okay with the guaranteed returns in a savings account. If this is true, allocating more to savings instead of the market will take out lots of risk. Of course inflation is also a concern, but that is a risk you should assess yourself.
#notfinancialadvice #publiccommunity #longterm #learning #invest #interestrates #federalreserve #news
11
0
