Will FED Hiking Rates Crash Markets?

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Tomorrow FED will be announcing which is likely a rate hike to the current FED's funds rate. This rate is important because it sets the minimum for banks and entities who set borrowing costs. At current rate it is 2.25% - 2.5% and expectation for tomorrow is a 0.75% rate hike making it 3% - 3.25%.

The question with today's post is will the FED's funds rate rising be bad for the stock market? To answer this question I will break out what I understand of the rate and how it effects companies bottom line.

US Bond Rates

At the beginning of this post is an image of the 3 month US Treasury Bill rate. Currently at 3.29% it means if you purchase $1000 bill you will earn 3.29% annual rate for 3 months. Lets look if it was 6 months bill rate.

What about further outdated years rate:

(All charts and data courtesy of ycharts.com)

What the US bond rates are telling us is the public are expecting US rates for borrowing dollar is on the rise, and on the rise at a rapid rate. The 1 year rate is going at 4.03% which has a spread of of +1.5% more than the FED's funds rate.

In conclusion the market is pricing higher rates while the FED even if they raise rates tomorrow at only 0.75% they are behind the curve with what the public is currently seeing at present time.

Corporations Money Flow

There are signs where new money entering stock markets is slowly declining. One sign is the 2022 IPOs, chart above courtesy of Nasdaq.com is showing the $ amount put into new stocks for 2022 which is at a decade low!

(Courtesy of www.hvst.com)

The US corporate debt as % of US GDP is hitting an extreme would not be ideal for corporations to grow. Chart above only goes up to 2016 and can illustrate that in past economic times when the borrow exceeds a certain percentage of the US GDP it has lead to a recession. Now where are we with this debt to % US GDP rate?

(Courtesy of St. Louis Fed)

Not only is the ratio today exceeded that of 2016 it has almost doubled since then. Yet as of 2022 the US economy has avoided a recession, the gray areas on the chart. However is this really the case or data is being manipulated. Every ramp up you see in the near future there is a gray area equating to a recession. The wider the gray bar the longer the recession. Will this time really be different? History does not repeat but it rhymes. We are going to have trouble times ahead.

Conclusions

The public is trading like rates are at 4% but the FED is planning to raise rates only up to 3%. The money flowing into new investments and borrowing rates from corporations are at a downtrend. I will add that the FED is not only increasing borrowing rates but will be executing Quantitative Tightening (QT).

The short definition of QT is the FED is selling their Treasury Bills and Bonds that they have bought over the years from the opposite of QT in Quantitative Easing (QE). This process of QT is essentially removing $ dollars from the market creating less money for public use. With less money but same amount of assets it can potentially a drop in asset prices, which include stock prices.

None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!



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12 comments
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I think the rates won't really crash he market and it will be due to the economic factors right now. The economy isn't looking great and you can see this through the earnings report as most companies aren't as bullish. In my view, I think the Fed doesn't have much control over the market and it just fuels the speculation.

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FED had control of the markets by controlling the narrative. If you remember just 2020 the FED had promised to support the economy as best it could when country was on lock down. It is obvious the low interest rates and QE help support asset prices including stocks. Now FED has changed the narrative so we shall see how this plays out. !PIZZA !WINE

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when you play stupid games of manipulating the economy you will win chaotic prizes

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Let us hope we don't follow their lead and win chaotic prizes ourselves !LOL !PIZZA

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The only thing I know in 2022, every time they increase the interest rate. The stock market and crypto market are in the red in the following days at a macroeconomic level!

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(Edited)

it costs money to borrow, which means the bank cannot get free money as much as they want to gamble in the casino with AKA the stock market. So it crashes because the only thing holding it up was interest free money. The winners were the company stock holders AKA rich people the poor people are the losers because everything gets more expensive. The middle class are the enemy AKA small business holders, they will and are getting destroyed once again. This time in spectacular fashion one 2 punches. Its been a long time in the making and its finally here. Looking at the SNP500 that chart is about to drop off a cliff. Crypto is the first asset that will be liquidated to cover losses.

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You are making multiple valid points and this is why so many people right now is recommending consumers to pay down their debt and try to keep debt near zero. Borrowing costs will continue to soar causing many who still have debt be crushed. !WINE !PIZZA

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The fundamental reason for that is because rising interest rates means fix income products will yield higher rates. Certificate of Deposits and Bank Saving Accounts are raising the interest rates paid to customers. So imagine if you were invested in stocks and crypto but see fix income products have yields rising rapidly, like every month 1% increases, would you not want to invest in fix income as the yields are certain versus stocks and crypto? !LOL !PIZZA

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I doubt they will increase by 1% every month. I prefer to buy and increase my positions on assets like dividend stocks and REIT.

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(Edited)

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