FED Rate Hikes Tested The Economy, How It Affects The Stock Market?

FED rate hikes have hit the headlines in 2022 up to six times. Rate hikes are good to fight inflation, and the 0.5-0.7 percent points added would do that in 2023. 

Expectations are rife that the FED will begin a slowdown in its attempt to control inflation, which hit over 8 percent for the first time in many years. The FED will prefer lower base points—at least below 50, to protect other stakeholders in the market. However, some experts expect that next year; the FED will also raise interest rates to further lower inflation to strike a balance between the interest rates vs. stock market debates.

While the FED’s focus is on inflation, other areas of the economy have felt the hit too. Noteworthy, commodities like crypto, stocks, and oil have had a massive hit, as people rush to put their money in safe areas. 

Pressure on Markets

About a year ago, in November 2021, crypto stocks peaked. Indications were low of any fed rate hikes to come, though inflation was slowly crippling after an extended period of Covid lockdowns. However, come December of the same year, the markets started to look forward to new hikes set for the New Year—2022. 

In January 2022, many commodities, including the top indices, reversed some gains picked in the bullish run of late 2021. It was also a downhill period for crypto, which had a magnificent 2021.

Since then, many stocks have reversed the gains made in 2021 and the crypto industry has witnessed a massive pullback.

Some small hints of positivity in the fourth quarter helped build investor momentum. However, that was not enough to make the S&P 17 percent down since the beginning of the year. Nasdaq is lower by about 30 percent.

The significant casualties of the year were the crypto markets, which rely heavily on a low-interest environment to thrive. The action by the FED made the environment less suitable for crypto commodities to thrive. Other high-growth stocks not in the digital asset domain, like Cloudflare, have also seen a turbulent year—losing by as much as 80 percent. 

Bitcoin and Ethereum, which control the bulk of the crypto industry, have all dropped by about 75 percent since November 2021 when they reached a milestone.

Effect of Rates Rising More

It is too early to predict whether central banks will continue to push the interest rates higher in the New Year. Noteworthy, many investors have already factored in the impact of new rates on their investments and have already made many adjustments to cover the next six months. As of now, the bulk of interest rate rises has already happened, meaning minimal impact on the rates planned for next year.

Ultimately, inflation has pushed more money out of the financial markets and pushed it elsewhere, meaning those wishing to take new positions in the market are already fewer. The volatility period will continue to follow the period of high interest. However, no one knows to what extent the market will continue to expect little interest from investors.

Noteworthy, as with the markets in the past. Periods of little investments or high volatility have often accompanied other periods of extended bullish runs. At some point, readjustments will happen, especially when the FED finally achieves its goal of lower inflation at some point in 2023.

Fears of Recession

With many market segments faltering, the fear of a recession has become more significant than at any other point. A likely inflation would bog down the market even further. However, the ultimate result is that the markets will rise again at some point. 

Bottom Line

Rising interest rates have a significant influence on the direction of the stock market. The stock market underperforms in an environment of high-interest rates. Commodities like crypto also are not spared when rates move too high. Ultimately, readjustments will caution the markets when the FED reserve finally achieves its goals.