By Kacper Janowski
After the Fed increased the interest rates by 75 bps in September, the US economy took a negative turn. On September 21, 2022 the 6th Federal Open Market Committee met for
the sixth time in this calendar year. They decided to raise the interest rate by another 75 basis points. This was the third consecutive meeting with a raise of .75 percentage points, which takes the federal funds rate over 3%, which is the highest since 2008.
The Federal Open Market Committee (FOMC) only meets 8 times a year, so the week of the meeting is always out of the ordinary. Normally, traders do not want to take too many trades until Wednesday at 2:30 when Jerome Powell speaks. This was the case last week as well. Traders do not want to take trade due to the uncertainty relating to interest rates. This is proven because Monday and Tuesday were days with little movement throughout the markets. Monday was a green day in the market for most stocks, led by Apple ($AAPL) being up over 3.7%. Tuesday had a day with a good amount of buying and selling but neither bulls nor bears could take control of the market.
Then came Wednesday. The day that everyone has been waiting for. The FOMC was the only thing talked about on all the financial news sources. One of which was “Stocks sink as investors wait for the Fed’s rate hike,” (CNN). This news title and many similar ones were thrown around all week, but especially Wednesday morning. The overall market had a lot of chop all morning long. Bulls controlled the market for a few minutes and then bears took over, and vice versa. No one knew what to expect from the meeting they had been waiting two months for.
Many speculated about what the interest hike will be, starting on September 13, 2022. CPI was announced and it came out at 8.3% which was a rise from the expected 8.1%. This was negative news since we want inflation to be lowered to 2%. The Fed increased interest rates in August, in hopes of lowering inflation, but inflation did the opposite. Red flashing lights went off in all investor’s heads. A straight sell off occured. This sell off occured because people were worried. The increase in CPI made people assume that the Fed would raise interest rates in the next meeting. This raise in interest rates discourages people from spending and borrowing money. They are discouraged from spending and borrowing money because it becomes more expensive to borrow money. Investors know that when people spend less, the GDP of a country will decrease and this overall leads the US into a recession. So that is why the overall increase of interest rates is not the best for stocks and the market. This was shown on September 13th since stocks and indexes dropped over 4% and it was the largest one day loss in 2022. People knew that this inflation would be combatted at the next FOMC meeting so they worried.
Fed watchers compared the probability of different Fed hikes a month before and after September 13th. On August 10th they predicted a 55% chance of 50bps, 45% chance of 75 bps, and a 0% chance of 100bps. After all of August and the inflation hike, those numbers changed drastically. The probability of a 50 bps increase, decreased from 55% to 0% in that one month time period. The probability of a 75 bps was at 68% on September 13th and the probability of a 100 bps increase, shot up from 0% to 32%. All these indicated that the market would turn for the worse.
At 2:00 Eastern Time the news came out. The federal interest rate was going to be increased by .75% in the month of September. This is the news that many expected, but they did not want to hear it. This affects the economy in many ways, but most importantly, it will likely put the United States of America into a recession. A recession is when the economy is in “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” In 2022, we have already had two successive quarters with a fall in GDP. In the first quarter of 2022, the GDP was -1.6%, while the second quarter has a GDP of -0.6%. When a recession occurs, everything goes bad: businesses fail and have to close doors, there is high unemployment, and bankruptcies occur very often.
Overall, this increase in interest rates is very negative to our economy. The interest rate hike will combat inflation and hopefully lower prices. As a society, we need to be prepared for an economic downturn, which is expected to come due to the FOC meeting on September 13, 2022.