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The Fed Pulls Out Another 0.75% Hike, Suggesting It’s Not Ready to Slow Down Until Inflation Comes to Heel

What Will Rising Interest Rates Do To Markets?

America’s central bank raised interest rates by 0.75% at its meeting of the minds on Wednesday, bringing U.S. interest rates to a range between 3.25% and 3.5%.

The hike means that U.S. interest rates are now the highest that they have been since the 2008 financial crisis. In spite of the hike being widely anticipated by investors, the S&P 500 fell 1.7% and the Nasdaq-100 fell 1.8%.

  • The biggest factor? The dot plot, which represents the expectations.

The dot plot includes the perspectives of various voting Fed members’ expectations for interest rates. Their views are represented by dots. In recent meetings, the plot has become something of a moving target:

  • In March, the dot plot results came to an average of 1.9% by year-end.
  • In June, the average figure had nearly doubled to 3.4% as Fed members priced in steeper hikes at the September, November, and December meetings.
  • It’s now September and the expectations have steepened once more. The Fed’s average is sitting at 4.4% by the end of the year — more than double what they expected in March and one point higher than their June projections.

In order to get to 4.4%, the bank will likely have to pull out another 0.75% basis point hike at its November meeting. The December meeting is more or less a ‘wait and see’ at this point. However, it is now widely understood by investors that the Fed now expects rates to reach 4.6% in 2023, which assures more heat on assets.

Of course, that 4.6% could slide either direction —- and the biggest factor is whether or not sky-high inflation starts to come back down to Earth. America’s chosen metric to measure inflation, the CPI, rose by a surprise +0.1% in August 2022 to 8.3% on the year. The Fed is widely expected to keep up the hikes until inflation closer to its 2-3% target.

  • The winners? The cash-rich and savers among us can expect higher interest rates in their bank accounts.
  • The losers? The debt-rich and spenders. That’s why it pays to pay down some of those more heady obligations.

And naturally, with interest rates rising, that means trouble for asset prices. Fed Chairman Jerome Powell suggested in a press conference today that a “difficult correction” could be needed to rebalance the housing market. The hawkishness, or the more aggressive and steep hikes, stand to take a toll on all kinds of assets — and that includes stocks.

If your first inclination is to run for the door, maybe sit down for a second. We offered a playbook to tackle the recession. In it, we recommended killing debt, building up your emergency fund, and not trying to time the market bottom.

Instead, we generally recommend staying the course —- but you should take into consideration your own finances and situation before doing so. But a friendly reminder: these kinds of dips are the ones that many retail investors wished for when the market rallied to all-time high after all-time high.

After all, the market is unpredictable and contributing to a qualified plan like a 401(K) or a Roth IRA generally means that money will be “out of sight, out of mind.” But if you can afford to buy these dips, there are fair odds that the market will stop dipping, and you’ll appreciate the upside. Seeing upside might take time, but for many investors, buying the market as it drops is better than trying to buy them as they rally.

That said, there are many options at your disposal besides stocks —- that hasn’t always been the case.. However, if you’re in a good place financially, there’s never a bad time to go long.

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