Stock Market Down And Stocks Plunged — Fed Rate Hike To Blame?


Fed rate hike caused stock market crash? As we enter the fourth quarter of 2022, rising inflation is dragging down stock markets. Most stocks, including the S&P500, have hit lows. This has created a volatile atmosphere that threatens economic growth.

As we move into the last quarter of 2022, it is apparent that the surge in the inflation rate is pulling stock markets down. Most stocks, including those of the top S&P500, have had their prices plunge to the lowest. This has created a very volatile environment and is a threat to economic stability and growth. 

Consequently, the Federal Reserve seeks to ease inflation by putting in place stringent monetary measures. Among the actions it is taking include increasing interest rates and rolling off maturing bonds. Of course, the move will slow economic growth but make investing in bonds lucrative.

Notice that in the first half of 2020, the US economy slowed slightly as it responded to the Covid 19 pandemic. But things changed for the better in 2021. In 2021, the economy grew by 5.7%, which was massive growth. As a result, the Fed optimized employment, which remains positive and up to date. But things don’t look bright in 2022. In fact, 2022 will become a reference point in the future when explaining how interest rate impact stock markets.

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The stock prices have dipped, and economic activities are slowly grinding to a halt.

As a result, the Fed is on the receiving end and has been forced to change its monetary policy strategy. Just a quick reminder, in the past four decades, the Fed has been pursuing the easy money policy. The policy helped to maintain the fund rate at lower levels while expanding its bond market holding. But the persistent inflation has forced it to tighten interest rates and roll over mature bonds. This is a departure from what has been happening in the past. Note that In the last decade, interest rates have remained low, encouraging investment in equities.

Unfortunately, things have changed and so as all will move into the last quarter of 2022, it is apparent that the inflation rate surge will continue pulling stock markets down. Most stocks, including those of the top S&P500, plummeted, with prices plunging to the lowest last week. This has created a very volatile and unpredictable environment.

The Fed has been pursuing an easy money policy for the past four decades. The inflation rate surge has forced it to tighten interest rates and roll over mature bonds. Most stocks, including those of the top S&P500, plummeted, with prices plunging to the lowest last week.

What action is the Fed taking?

The Federal Reserve seeks to ease inflation by taking stringent monetary measures. Among the actions it has put in place include interest rate hikes and rolling off maturing bonds. The move has slowed economic growth and has made investing in bonds lucrative.

Take note that as a result of the Covid 19 pandemic, the US economy slowed down in the first half of the year 2020. But by 2021, things were looking up, with the economy growing by 5.7% .This was a massive growth that optimized employment, which remains positive up to today. Unfortunately, the surge in inflation has forced the Fed to change its strategy. The agency no longer pursues the easy money policy, which helped maintain its fund rate at lower levels while expanding the bond market holding. Instead, it is tightening interest rates and rolling over maturing bonds.

During the four decades, interest rates remained low and encouraged investment in equities. But with the surging inflation, maintaining a low-interest rate is not tenable. Thus, the central bank has been forced to implement stringent measures, including hiking the rates to try to control inflation. The shift in policy has resulted in a rise in the bond yield. Meaning that further hikes will affect the economy negatively.

The spike in inflation has compelled the Federal Reserve to alter its approach. Throughout the past four decades, low interest rates have encouraged equity investments. With inflation on the rise, however, low interest rates are untenable. The policy change has resulted in an increase in bond yields.

Effects Of Feds Action

  • Impact the equity market negatively- a high-interest rate affects companies’ future earnings and growth. It also leads to a decline in economic activities, including slowing down the GDP. Companies become unprofitable, and the stocks become unattractive. Eventually, it pushes prices down.
  • It makes bonds attractive — the high-yield bonds and deposits pay more than stocks.  So they become more competitive and attractive. So investors stop biding for stocks because future earnings are likely to be lower compared to earnings from bonds. It further exerts pressure on stock prices, pulling them down.

Which Companies Are Most Affected?

Stocks from S&P 500 companies, such as Amazon, Apple, and Meta platforms are the worst hit. Their prices have come down tumbling as traders avoid buying stocks they think are overvalued. The situation is made worse by the contracting economy, which is unable to guarantee meaningful earnings in the future.

The persistent inflation has increased the resoluteness and the actions the fed will take to tighten the monetary policy in trying to slow down inflation. Unfortunately, the policy shift only created changes in the market. It has constricted growth and brought stock prices down.

Also, the high-interest rates are downgrading earning expectations resulting in more pressure on stocks. It has also increased operation costs, forcing some companies to raise the prices of goods and services to keep them afloat. The actions have elevated inflation further.

In some cases, the high inflation rate resulted in asset repricing in the first half of 2020. It propelled stocks into the bear market. So as the Fed gets more aggressive and increases interest rates further, a similar reprising is likely to occur.

Is The Fed To Blame For The Tumble?

Yes, the Fed must shoulder some blame. It did not take appropriate measures in May when the rate moved to 5%. According to Jerome H. Powell, Chair of Federal Reserve System — the fed thought the move was temporary and that it would correct itself with time. However, the persistent inflation has proved him wrong. So, it is a wake-up call that will force the Fed to tighten the monetary policy even more.

The Fed has, thus, decided to use all the tools available to stem the menace. Last Wednesday, it raised the rate for the third time by 75 basis points. The move has lifted the rates higher and is expected to keep them elevated at 3.25%. What’s more, if the fed chairman Jerome H. Powell lives up to the threat to raise the rate to 4.4% before the end year, it will stifle the US economy. Unfortunately, hiking the rates is the best tool that will help the fed to control inflation.


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