Interest rates play a crucial role in the stock market and economic activity at large. The interest rate determines how expensive it is for people and companies to borrow money, affecting company choices like borrowing and production. Generally, although not always, the stock market tends to rise when interest rates are low. We saw this firsthand over the past year and a half as the Federal Reserve lowered interest rates to near zero after the COVID-19 recession to boost the economy, and the financial steering has worked so far as the stock market has roared back. Companies have returned to their pre-COVID levels.
However, it now looks like the Fed is ready to steer the ship back to what it was a couple of years ago pre-covid. You may be thinking, wasn’t an increase in rates expected? Well, it was, but the Feds may be increasing rates more frequently than first expected, according to Goldman Sachs. Specifically, economist Jan Hatzius said the Fed could enact four quarter-percentage-point rate hikes in 2022, denoting an even more aggressive path than what the bank had indicated just a month ago. Goldman has previously made predictions like this – with their forecast for the three previous rate hikes ending up in line with the choice Fed officials penciled in. Currently, the Fed’s benchmark overnight borrowing rate sits between 0%-0.25%. Fortunately, this resembles nothing unordinary from a broader perspective, with the funds rate only likely increasing to 2.04% by the end of 2026 – still lower than the 2.5% high reached in the last tightening cycle that ended in 2018.
What do you think about the feds increasing the rate? And is it a cause for a re-evaluation of certain investments?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.