Markets “In a Nutshell” for September 12, 2022
Investment Week at a Glance
Stocks finished higher for the week. The Dow Jones Industrial Average rose 2.70%, the S&P 500 was up 3.60%, and the NASDAQ rose 4.10%. Foreign stocks (MSCI EAFE) were down, falling 1.30%. Bond prices were down for the week, with the 10-year U.S. Treasury ending the week at 3.31%. (Data source: Wall Street Journal)
After three consecutive weeks of substantial losses for the market, last week was a positive week for the market being up around 3%-4% across the board for domestic indices. Even with the S&P 500 up 3.6% this past week, it is still down nearly 15% on the year. Although there have been many headlines throughout the year that have caused the market to move, the one that continues to cause worry is inflation. Coming into the year expectations were that we were near peak inflation around 5% but we saw as high as 9% inflation earlier this year. Although we have come down slightly, we are still near levels of inflation we have not seen since 1981. With inflation so high, the Fed has had to raise rates quickly which slows the economy down in hopes of deteriorating demand to slow prices from rising.
Fed Policy Moving Forward
The Fed has its next meeting taking place September 20-21 which means we will get another rate hike next week. After the last rate hike, the market expected this upcoming hike to be 0.50% but since then expectations have shifted to seeing a 0.75% rate hike. This would bring rates up to 3.00% with the expectation of 2 more 0.50% rate hikes before the year ends, bringing rates up to 4.00% from the 0% we started the year at. We have not seen the Fed act as aggressively as they have this year in decades which has caused the market to be volatile as they try to price in these new rates. The Fed has taken the approach to stop inflation as quickly as it can and if the economy contracts too much they now have the tools to lower rates and give the economy some relief. Although we have seen a contraction in the economy, the labor market remains strong giving the Fed more confidence in being able to raise rates.
When was the last time the Fed Funds rate was 4% or higher? (Scroll Down for Answer)
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3) 2007. The last time the Fed Funds rate was at 4% or above was in December, 2007 right before the Fed lowered rates all the way to zero by the end of 2008 as economic conditions in the US quickly deteriorated.