5 Things You Need to Know About Fed’s Biggest Rate Hike In Decades

interest rate hike

The Fed got aggressive and announced a 75 basis point increase in interest rates and the market reacted positively, with the Dow up over 400 points at one point in the day.  We’ve been through this before though and that’s why today will be a day to be cautious.  Last month we also had a pop around the Fed announcement and gave it all back the day after.  

Let’s talk about the 5 things you need to know about this historic increase in interest rates.

What is the Fed Doing?

In an effort to combat out-of-control inflation, the Fed is increasing interest rates to slow down the growth of the economy.  The trick is to do so without causing a recession.  They’re attempting to find a “soft landing” and have this be a blip in the timeline of the post-pandemic market.

The last couple of days have been difficult, with the markets dropping  6%, and the consumer sentiment index, published by the University of Michigan, just hit an all-time low (blue line in the chart below).  Consumers are losing hope in this economy and most believe a recession in inevitable.   

interest rate hike

The Fed reacted today with an aggressive .75% increase.  The last time anyone increased rates by .75% was 1994, during a similar period of growth.  The difference is in 1994 they were trying to stop inflation from happening.  Today we’re trying to catch up and reduce inflation.  

What Is The Goal?

The price of goods and services is too high and global demand is slowing.  The economy is still strong and unemployment is low, so the goal here is to raise interest rates to further slow down demand, increasing supply levels, which would ultimately lower the cost of goods.  They just need to do so without stalling the economy completely.  By raising rates on long-term loans like cars and houses, the Fed risks weakening the economy for years to come.

What Will the Fed Do Next?

The Fed wants interest rates to be around 3.5% by December 2022.  That means we have several more rate hikes to go by the end of the year, but the rate of the hikes will largely depend on how the Consumer Price Index and other key numbers come out.  If we see prices stabilizing or going down, the rate and extent of each hike may be smaller.  The larger-than-anticipated hike today was due to last week’s report showing that inflation was accelerating once again.

What About Consumers?

Mortgage rates have been on the rise and the higher the interest rates go, the fewer people that can afford homes and the fewer businesses can invest in their future.  Overall this will mean the economy will shrink from current levels, and it could mean layoffs, hiring freezes, etc. in the job market. With unemployment at near-record lows, the Fed is counting that the job market can sustain a little slowdown.  

Consumers will spend less on discretionary spending and will focus more on necessary items.  This is why you usually see Consumer Defensive/Staples, like Kroger (KR), Costco (COST), Walmart (WMT), Procter & Gamble (PG), and others gain value, while stocks like Best Buy (BBY), Estee Lauder (EL), for example, struggle in comparison.

What Happened in 1994 and What Does That Mean Now?

The last time the Fed raised rates by .75% was 1994, but that was a different scenario.  The Fed anticipated inflation and raised rates to get in front of the issue.  The year finished slightly negative, falling 1.2% and the Fed avoided a recession and the following year stocks rebounded by 34%.  With 6 months to go this year, will we be so lucky to climb out of the 22% hole we’re in and see wonderful gains next year?  

Yesterday’s Zoom (ZM) trade idea was helped along by an overall positive market, but it finished up today by 5.68%.  Want to know the stock I’m looking at next?

Today’s trade idea is a bearish trade on AMN Healthcare Services (AMN).  The chart peaked and made a new 10-day high yesterday, but not only did it close below the open, but it also lost on a day when the market was up.  Yes, I know it was technically up 2.62% yesterday, but that’s the difference from the previous day’s close.  It lost value from yesterday’s open to yesterday’s close.  It finished in the lower range of the day and after a gap up, I’m looking to see if this stock can fill the gap on the way down, meaning, fall back down to about $101, which was the high of the candle before the gap up.

 

interest rate hike

The stock has options and a 15 July 22 $95 put option is going for $2.30.  If the stock does fall to $100 by July 15th, you have the potential to make about $101 on your $230 investment (per contract).  That’s a potential gain of over 40% in 30 days.

Like I’ve been saying for days now, you need to be careful with the heightened volatility in the market.  If investors are overly excited about the rate hike, this stock could go up with the market.  But if the market sheds off the gains from yesterday, a bearish position in this stock might work out. 

If you have any questions, comments, or anything we can help with, reach us at any time.

 

Jeff
Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

Job Cuts And Stock Buybacks Keys To Success In 2023

Job Cuts And Stock Buybacks Keys To Success In 2023

memberswis
On February 2, 2023

February 3rd, 2023Job Cuts And Stock Buybacks Keys To Success In 2023 The thing I’ve learned from this earnings season is that a company can have consecutive quarterly drops in revenue and provide a lower

Fed Raises Rates But Bulls Are Still In Control

Fed Raises Rates But Bulls Are Still In Control

memberswis
On February 1, 2023

February 2nd, 2023Fed Raises Rates But Bulls Are Still In ControlOk, bulls. You win.  I will start lifting my bearish stance on the market.  Despite the final 10-minute market sell-off and a Dow that finished

What Past Fed Announcements Tell Us The Market Will Do Today

What Past Fed Announcements Tell Us The Market Will Do Today

jeffwood
On January 31, 2023

February 1st, 2023What Past Fed Announcements Tell Us The Market Will Do TodayWatch out - this article is going to have some math.Here we are once again on Fed Announcement day. Most of the folks

The Hidden Profits Of 2023

The Hidden Profits Of 2023

jeffwood
On January 30, 2023

January 31st, 2022The Hidden Profits Of 2023There is still one more trading day left in January, but if the adage “as the S&P 500 goes in January, so goes the year” holds true, the markets

The Fed Goes Up Against Earnings This Week

The Fed Goes Up Against Earnings This Week

jeffwood
On January 29, 2023

January 30th, 2022 The Fed Goes Up Against Earnings This Week We are in peak earnings season with some heavy hitters like Pfizer (PFE), Snap (SNAP), Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL), and Apple

Smoother Sailing in 2023

Smoother Sailing in 2023

user
On January 18, 2023

January 17th, 2022Smoother Sailing in 2023 Nothing has changed since the end of 2022, yet traders have already decided that this year won’t be as bad as the last. Bulls have been piling into stocks

The Rise Of Bing Over Google – That’s No Joke

The Rise Of Bing Over Google – That’s No Joke

jeffwood
On January 12, 2023

January 12, 2023 The Rise Of Bing Over Google - That’s No Joke Before we talk about two tech giants getting ready to battle it out once again, let’s look at the overall market. The

Why I Ignore Most Of The News

Why I Ignore Most Of The News

jeffwood
On January 8, 2023

January 9th, 2022 Why I Ignore Most Of The News It’s easy to get caught up in the financial headlines. I’ve certainly done it. Last week shows why I ignore most day-to-day stories. I know

Is Biogen A Buy Or A Sell?

Is Biogen A Buy Or A Sell?

jeffwood
On January 5, 2023

/*! elementor - v3.5.5 - 03-02-2022 */ .elementor-widget-divider{--divider-border-style:none;--divider-border-width:1px;--divider-color:#2c2c2c;--divider-icon-size:20px;--divider-element-spacing:10px;--divider-pattern-height:24px;--divider-pattern-size:20px;--divider-pattern-url:none;--divider-pattern-repeat:repeat-x}.elementor-widget-divider .elementor-divider{display:-webkit-box;display:-ms-flexbox;display:flex}.elementor-widget-divider .elementor-divider__text{font-size:15px;line-height:1;max-width:95%}.elementor-widget-divider .elementor-divider__element{margin:0 var(--divider-element-spacing);-ms-flex-negative:0;flex-shrink:0}.elementor-widget-divider .elementor-icon{font-size:var(--divider-icon-size)}.elementor-widget-divider .elementor-divider-separator{display:-webkit-box;display:-ms-flexbox;display:flex;margin:0;direction:ltr}.elementor-widget-divider--view-line_icon .elementor-divider-separator,.elementor-widget-divider--view-line_text .elementor-divider-separator{-webkit-box-align:center;-ms-flex-align:center;align-items:center}.elementor-widget-divider--view-line_icon .elementor-divider-separator:after,.elementor-widget-divider--view-line_icon .elementor-divider-separator:before,.elementor-widget-divider--view-line_text .elementor-divider-separator:after,.elementor-widget-divider--view-line_text .elementor-divider-separator:before{display:block;content:"";border-bottom:0;-webkit-box-flex:1;-ms-flex-positive:1;flex-grow:1;border-top:var(--divider-border-width) var(--divider-border-style) var(--divider-color)}.elementor-widget-divider--element-align-left .elementor-divider .elementor-divider-separator>.elementor-divider__svg:first-of-type{-webkit-box-flex:0;-ms-flex-positive:0;flex-grow:0;-ms-flex-negative:100;flex-shrink:100}.elementor-widget-divider--element-align-left .elementor-divider-separator:before{content:none}.elementor-widget-divider--element-align-left .elementor-divider__element{margin-left:0}.elementor-widget-divider--element-align-right .elementor-divider .elementor-divider-separator>.elementor-divider__svg:last-of-type{-webkit-box-flex:0;-ms-flex-positive:0;flex-grow:0;-ms-flex-negative:100;flex-shrink:100}.elementor-widget-divider--element-align-right .elementor-divider-separator:after{content:none}.elementor-widget-divider--element-align-right .elementor-divider__element{margin-right:0}.elementor-widget-divider:not(.elementor-widget-divider--view-line_text):not(.elementor-widget-divider--view-line_icon) .elementor-divider-separator{border-top:var(--divider-border-width) var(--divider-border-style) var(--divider-color)}.elementor-widget-divider--separator-type-pattern{--divider-border-style:none}.elementor-widget-divider--separator-type-pattern.elementor-widget-divider--view-line .elementor-divider-separator,.elementor-widget-divider--separator-type-pattern:not(.elementor-widget-divider--view-line) .elementor-divider-separator:after,.elementor-widget-divider--separator-type-pattern:not(.elementor-widget-divider--view-line)

This Index Never Experienced Two Negative Consecutive Years

This Index Never Experienced Two Negative Consecutive Years

jeffwood
On January 4, 2023

/*! elementor - v3.5.5 - 03-02-2022 */ .elementor-widget-divider{--divider-border-style:none;--divider-border-width:1px;--divider-color:#2c2c2c;--divider-icon-size:20px;--divider-element-spacing:10px;--divider-pattern-height:24px;--divider-pattern-size:20px;--divider-pattern-url:none;--divider-pattern-repeat:repeat-x}.elementor-widget-divider .elementor-divider{display:-webkit-box;display:-ms-flexbox;display:flex}.elementor-widget-divider .elementor-divider__text{font-size:15px;line-height:1;max-width:95%}.elementor-widget-divider .elementor-divider__element{margin:0 var(--divider-element-spacing);-ms-flex-negative:0;flex-shrink:0}.elementor-widget-divider .elementor-icon{font-size:var(--divider-icon-size)}.elementor-widget-divider .elementor-divider-separator{display:-webkit-box;display:-ms-flexbox;display:flex;margin:0;direction:ltr}.elementor-widget-divider--view-line_icon .elementor-divider-separator,.elementor-widget-divider--view-line_text .elementor-divider-separator{-webkit-box-align:center;-ms-flex-align:center;align-items:center}.elementor-widget-divider--view-line_icon .elementor-divider-separator:after,.elementor-widget-divider--view-line_icon .elementor-divider-separator:before,.elementor-widget-divider--view-line_text .elementor-divider-separator:after,.elementor-widget-divider--view-line_text .elementor-divider-separator:before{display:block;content:"";border-bottom:0;-webkit-box-flex:1;-ms-flex-positive:1;flex-grow:1;border-top:var(--divider-border-width) var(--divider-border-style) var(--divider-color)}.elementor-widget-divider--element-align-left .elementor-divider .elementor-divider-separator>.elementor-divider__svg:first-of-type{-webkit-box-flex:0;-ms-flex-positive:0;flex-grow:0;-ms-flex-negative:100;flex-shrink:100}.elementor-widget-divider--element-align-left .elementor-divider-separator:before{content:none}.elementor-widget-divider--element-align-left .elementor-divider__element{margin-left:0}.elementor-widget-divider--element-align-right .elementor-divider .elementor-divider-separator>.elementor-divider__svg:last-of-type{-webkit-box-flex:0;-ms-flex-positive:0;flex-grow:0;-ms-flex-negative:100;flex-shrink:100}.elementor-widget-divider--element-align-right .elementor-divider-separator:after{content:none}.elementor-widget-divider--element-align-right .elementor-divider__element{margin-right:0}.elementor-widget-divider:not(.elementor-widget-divider--view-line_text):not(.elementor-widget-divider--view-line_icon) .elementor-divider-separator{border-top:var(--divider-border-width) var(--divider-border-style) var(--divider-color)}.elementor-widget-divider--separator-type-pattern{--divider-border-style:none}.elementor-widget-divider--separator-type-pattern.elementor-widget-divider--view-line .elementor-divider-separator,.elementor-widget-divider--separator-type-pattern:not(.elementor-widget-divider--view-line) .elementor-divider-separator:after,.elementor-widget-divider--separator-type-pattern:not(.elementor-widget-divider--view-line)

PREV NEXT
Receive the latest news

Subscribe To Our Daily Newsletter

Get notified about new articles, special events, training, and much more

Like What You See?

Leave your info below to get more options and trading ideas to your inbox

Yes, send me news to my inbox.